Divorce and Bankruptcy
If you are contemplating divorce or separation, and if you are about to obtain a financial settlement as part of a divorce, particular care must be taken where there is a prospect that one of the spouses may become bankrupt.
A series of high profile cases have highlighted the risk that such settlements are not safe from creditors. Even where a spouse has obtained the right to stay in the marital home until their children grow up or he or she remarries, this can be overridden to pay off the debts of a bankrupt partner’s debts.
In the case of Vivienne Avis, the Court of Appeal ruled in July 2007 that the interests of the bankrupt’s creditors outweigh all other circumstances unless the circumstances of the case are exceptional. This confirms an earlier High Court decision in May 2007 concerning Wendy Pearl Haines, where an order transferring a house from a husband to a wife was overturned when bankruptcy trustees successfully set aside the divorce order, forcing Mrs Haines to give back her husband’s share of the house unless he discharged his debts.
These decisions have completely reversed the widely accepted position that divorce settlements made by the matrimonial courts after a fully contested hearing are beyond reach in bankruptcy courts and cannot be overturned by a bankruptcy court.
The impact of the Avis decision is far reaching. Trustees in bankruptcy will be free to see whether there are other instances where there are assets in a divorce case that they can now proceed against.
It has been estimated that these decisions could affect at least 20 per cent of the 120,000 people expected to file for divorce this year.
Careful planning and informed legal advice are crucial to an understanding of the implications of transactions which take place following a financial settlement as part of a divorce or separation agreement. This is particularly true today when many families face the financial pressures of maintaining businesses with increasing overheads and tightened profit margins, or keeping their homes safe from mortgage repossession in the face of rising mortgage monthly payments following recent interest rate increases. Equally popular is the retention of an interest in a family home, otherwise transferred to the other spouse, until the children grow up, as a way of then achieving a fair share of the assets (which may be 50%).
When you consult a lawyer at Cumberland Ellis LLP, you have immediate access to our Private Client Group who can guide you to manage and protect your wealth.
By Hazel Wright, Partner – Family Department