Lawyers say surge in bankruptcies will impact divorce settlements

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As the impact of the pandemic continues to be felt across the UK economy divorce law experts say they are preparing for an increase in the number of financial orders impacted by voluntary bankruptcies, involuntary bankruptcies, and debt relief orders (DROs).

According to Monthly Insolvency Statistics, there were 1,864 DROs and 620 bankruptcies in July 2021 alone in England & Wales.

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However, with experts predicting a rise in unemployment as a result of the end of the government job retention scheme, family lawyers say that number is also likely to rocket which could have unexpected consequences for divorcing couples.

Cara Nuttall from law firm Simpson Millar explained: “With lockdown and various Covid-19 restrictions putting a strain on both business and home life environments, we expect the issues around dealing with bankruptcy and divorce to become more frequent in the months ahead.”

“What people don’t usually realise is that a property, or any other type of asset that is owned jointly by a divorcing couple, cannot be transferred to the other party as part of the financial settlement in the divorce proceedings if one or the individuals is placed into bankruptcy, without first getting the consent of the bankruptcy trustee.

“The trustee is responsible for handling all the assets and income of the party who has been declared bankrupt and will deal with the assets in a variety of ways in order to pay the creditors of the bankrupted party.

“While the interplay between bankruptcy and divorce is complex, essentially commercial creditors take priority.”

Cara explains that in most divorce cases the financial order is absolute, and the lump sum and any ongoing maintenance payments must be made by order of the court. However, when there is a bankruptcy, the normal rules don’t apply.

She added: “We’ve seen this issue hit the headlines recently when a wealthy financier avoided paying his ex-wife a £2.6 million divorce bill after declaring himself bankrupt, and while most people aren’t losing out on quite so much money the reality is that this is issue is far more common than people think.

“Our advice to anyone entering into divorce proceedings who is concerned about their spouse’s level of debt and believe there is a risk he/she may declare themselves bankrupt is to get expert advice at the earliest opportunity.

“It is sometimes possible to do a deal with the trustee, and we can also look to ensure you still get what is fair and realistic given the circumstances.”

Cara added that while most bankruptcy situations are genuine, in some extreme instances a person might decide to make themselves bankrupt unnecessarily in order to frustrate the other party within the divorce proceedings.

She added: “There have been cases where one party declares themselves bankrupt in an attempt to get out of paying what is owed. However, in these circumstances, the non-bankrupt party can apply to the Court to annul the bankruptcy if they can demonstrate to the Court that the order should not have been made.

“For example, if it was an abuse of process and an attempt to avoid the divorce proceedings the Court has the authority to annul the bankruptcy order under Section 282 of the Insolvency Act 1986.

“Again, our advice is if you suspect that a spouse has declared themselves bankrupt possibly to avoid a settlement with you, then do also speak to a Solicitor as soon as possible. We can work closely with other experts to consider your personal financial circumstances and whether there is a possibility to annul the bankruptcy.”

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