Divorce Settlements and Subsequent Bankruptcy

Over the last few years many divorced couples (and indeed their lawyers) have become frustrated at the way in which divorce settlement orders were potentially capable of being overturned in the event that one of the former spouses subsequently fell bankrupt.

This concern commonly arises in a divorce scenario where the matrimonial home is transferred into one spouse on the basis that the spouse who remains in occupation makes no claim against the other's capital and most usually a pension provision. Previously there was always a high risk that a bankruptcy order made after the transfer of the property by the now bankrupt could (on application by the appointed trustee in bankruptcy) jeopardise and challenge the validity of the original transfer and effectively set aside the original court order. This would often leave the spouse in occupation of the home in a very precarious and uncertain future position.

A light appeared at the end of the tunnel in the form of a landmark decision of Hill v Haines [2008] 1 FLR 1192. The Court of Appeal decided that this type of order (the transfer of one spouse's interest in the family home to the other) being one of the most common in divorce law should not be capable of automatically being treated as if it had never occurred upon application by a trustee in bankruptcy. This was qualified by stating that if both spouses had hatched a plan to deprive say the husband's anticipated creditors (or there was some other improper reason) a trustee would be entitled to set aside the property transfer order.

The decision also made it clear that on a practical basis the only way to help ensure that a property transfer was not later undone by a trustee in bankruptcy was to achieve the transfer pursuant to an Order of the court. A simple agreement between the spouses would not be sufficient and an Order was required to help provide added protection for the spouse in occupation of the property.

The Family and Matrimonial Department of Dunn and Baker are well versed in dealing with these troubling and complex issues. We anticipate that, sadly in this present climate, the impact of bankruptcy on past and future divorce settlements will be an area where our expertise will prove to be invaluable to help ensure that property orders remain as effective and safe from challenge as possible. If you believe the issues raised within this feature may impact upon your financial circumstances and future we would be happy to chat it through with you.

Darren Cleverdon

Partner

30th March 2009