Your Divorce and Bankruptcy questions answered – Find out about the impact bankruptcy has on divorcing couples and where you stand financially.
1. What is the impact of bankruptcy on divorcing couples?
One or other or both parties to a marriage or civil partnership might become bankrupt while negotiations are continuing post separation, or during proceedings in court, or even after an agreement has been entered into or a decree of divorce has been granted.
On the award of sequestration as it is known, the whole estate of the bankrupt person vests in his/her trustee in bankruptcy, with some exceptions. (Pension rights do not normally vest in the trustee for example.)
The bankrupt’s assets are identified and sold or otherwise realised by the trustee and the proceeds are used to pay his or her creditors according to certain orders of priority.
2. So, where does a wife stand if her husband is sequestrated before or after they have separated?
In relation to the family home, if this is owned jointly, the husband’s share of the house will vest in his trustee. In practice the trustee will not be able to sell a share of a house (unless of course the house can be divided into two viable parts) and so will either want to negotiate with the wife for the wife to purchase her husband’s share of the property and if she cannot or does not wish to, the property will be sold.
If the family home is in the husband’s sole name and he is made bankrupt, then the trustee would have to get the permission of the court before he could sell the property. This is because his wife has a right to occupy the house by operation of law.
If the house is in the sole name of the wife, then the house will not vest in the trustee at all.
But, if the husband transferred the house to his wife either in whole or in part within the five years prior to him becoming bankrupt, the trustee can challenge that transfer as being a gratuitous alienation. (see 5 below)
3. What happens then if the husband has paid his ex-wife a sum of money following a decree of divorce being granted or in implement of a condition in a minute of agreement on separation?
If the money was been paid before the husband is made bankrupt, and if it was paid in implementation of an order of court, the trustee can ask for the order to be recalled. He can do so if at the time the order was made the husband was insolvent, or if he became insolvent after he paid in terms of the order. The trustee can apply for recall at any time up to five years from the date of the order being granted and if recall is granted the trustee can recover the money paid by the husband to his ex-wife.
Before a court recalls an order for payment of a capital sum on divorce it will take into account all of the circumstances including the financial circumstances of the ex-wife in whose favour the order was made.
4. What happens if the husband owes his ex-wife a sum of money following decree of divorce or in implement of a condition in a minute of agreement on separation, and he has not paid and is then made bankrupt?
The wife will have to claim in the debtor’s estate in the same way as any other creditors. She will rank as an ordinary creditor unless she has taken a security over the debtor’s property to secure payment. Ordinary creditors are paid after creditors with a security and after preferred creditors. Preferred creditors include the Inland Revenue. If a wife is owed money from her husband after having given him a loan, repayment is a debt postponed even to the debts of other ordinary creditors.
5. What happens if a husband anticipates that he is going to be made bankrupt, and he transfers assets into his wife’s name in contemplation of that?
If he is made bankrupt his trustee can challenge the transfer as a gratuitous alienation if the transfer was made in the five years before sequestration is granted. If successful, the alienated asset is transferred back into the estate of the bankrupt and the trustee can use that asset to satisfy the claims of the bankrupt’s creditors. A defence to an action to reverse a gratuitous alienation can be stated if after the alienation the debtor’s assets were still greater than his debts or that the alienation was made for adequate consideration or that the alienation was a birthday, Christmas or other conventional gift or generally that it was an alienation which was reasonable for the debtor to make.
I would suggest, therefore, that implementing the terms of a minute of agreement entered into after negotiation between a husband and wife, would be regarded as an alienation for adequate consideration if, as a result of the agreement assets had to be transferred from one spouse to the other to effect fair sharing of their assets. It would only be if the agreement was skewed or unfairly generous to the non bankrupt spouse that the transfers in terms of that agreement might be challenged as gratuitous.
6. What happens if the husband is paying maintenance to his wife and child and is made bankrupt?
A bankrupt is allowed to keep income which accrues to him other than income from assets vested in his Trustee. So if the bankrupt works or receives a pension, that income falls to him. He can keep so much of it as he needs for his own reasonable needs and for payment of aliment, periodical allowance or child maintenance. If his income is more that he needs, the Trustee can apply for a contribution order and if granted the bankrupt will have to hand over any surplus income to his Trustee.