Bankruptcy and Financial Remedy Proceedings

The financial consequences of a marriage breakdown, alone, can be very difficult for people to navigate. However, with the current cost of living crisis, rising mortgage interest rates and the impact of the COVID pandemic still being felt by many, spiralling debts and personal insolvency is undoubtedly on the rise.

There are two ways in which an individual can become bankrupt:-

1. Creditors (those owed money) can apply to the courts to make an individual bankrupt, or;
    
2. The individual themselves can apply.

Following the Bankruptcy Order being made, a trustee in bankruptcy will be appointed. Upon appointment of a trustee, the bankrupt’s assets vest immediately in that trustee, whose job it is to realise and distribute the bankrupt’s estate.

Sadly, following a marriage breakdown, it is not uncommon for bankruptcy proceedings to end up running concurrently alongside financial remedy proceedings (proceeding which can be issued after a divorce application is filed to deal with the overall financial division and provision). Bankruptcy can have a significant effect on financial remedy proceedings, which often result in the non-bankrupt spouse finding themselves in direct competition with the trustee in bankruptcy.

When the Family Court considers division of assets following the breakdown of a marriage, there are many factors that they have to take into account – including the primary factor being the needs of the party and their children. However, a Bankruptcy Court will not take into account other factors, such as the party’s needs, and will look at the division of the assets on a real property basis, and the creditors will take priority over the non-bankrupt spouse.

Timing is very important when looking at conflict between financial remedy proceedings and bankruptcy proceedings; as to when Property Adjustment Orders are made, against when a bankruptcy petition was presented.

1. If a Property Adjustment Order (i.e., order by the court dealing with the division of the assets) is made before the bankruptcy petition is presented, this will (generally, subject to challenges) bind the trustee in bankruptcy.
    
2. If the bankruptcy petition is presented, or Bankruptcy Order made before the Family Court has made the Property Adjustment Order, then (generally and subject to challenges), the Family Court will not have any power to make any Property Adjustment Orders. If the Bankruptcy Order is made, then only the Bankruptcy Court has the power to deal with the bankrupt’s assets.

This is a complex area of law to navigate and there are a number of challenges that can be made in both courts and within both sets of proceedings. One obvious example within a marital breakdown, is that the bankrupt spouse has petitioned for bankruptcy purely as a tactic to de-rail the Family Court’s ability to deal with any claim by the non-bankrupt spouse. In certain circumstances, the non-bankrupt spouse will be able to successfully challenge this and have the Bankruptcy Order annulled.

Do you need some advice? 

If you are going through a marital breakdown and wish to seek advice in respect of the potential impact of bankruptcy, please do not hesitate to contact a member of the family team to arrange an appointment for further advice.

Please call 01242 574 244 or send an email.