It is usually the case that where a spouse is declared bankrupt, it will have an effect on the other party too.  This is due to the fact that a Trustee in Bankruptcy is under a duty to investigate any assets that may be available for the benefit of the creditors, this is extensive assets which are jointly owned between the parties, as no duty is owed by the Trustee to the former spouse or to the family.

 

The Insolvency Act 1986 gives the Trustee a number of powers to upset earlier transactions, including potentially any earlier divorce settlement and then go on to enforce the realisation of assets in the bankruptcy.

 

The powers available to a Trustee include:

 

1.                  A power to upset an earlier divorce (up to five years prior to bankruptcy) at a transaction at an undervalue.

 

According to insolvency legislation, it does not matter whether the bankrupt was solvent at the time of the settlement or whether the settlement was made in the Family Courts or outside of the Courts.

 

In the case of Hill and Bangham v Haines, a Bankruptcy Court considered whether the husband’s half share in the matrimonial home which has been transferred to the wife by the Family Court only for him to be made bankrupt some years later, should be transferred to the Trustee in Bankruptcy.

 

The Court held that only where there had been some fraud, collusion or dishonesty on the part of the bankrupt and his spouse, would the Bankruptcy Court upset earlier settlements.

 

The general principles which can be drawn from this case are that:

 

1.                  The Bankruptcy Court can go behind an Order made in the Family Court where in one way of another the Court has been misled into making an Order which is contrary to creditor’s interests.

 

The interests of the creditors will then outweigh the interests of the former spouse in the family.

 

The determining factor is what information was presented to the Family Court at the time of the settlement, on what evidence does the Trustee have of the Court having been misled.

 

2.                  Unless the spouse is in the position to purchase the Trustee’s interest in the equity in the home, the Trustee will force the family out of the property, within three years of the bankruptcy, in order to realise his share of the equity.  If the Trustee has a share in the equity of the property, the family may be allowed to stay in the home without buying out the Trustee’s interest but only if there are exceptional circumstances.

 

Under insolvency legislation, the family is given one year to make alternative arrangements or agree a deal with the Trustee, but in years two and three, the creditor’s interest prevail over the family.

 

If you require further information, please feel free to contact one of our solicitors for further advice and assistance.