UK: Hard Times And Divorce

Last Updated: 22 August 2012
Article by John Darnton

On 8 August the Governor of the Bank of England, Sir Mervyn King, warned that "the recovery and rebalancing of our economy will be a long, slow process".

There are differing views as to the extent to which financial problems lead to marital breakdown and divorce.

In the summer of 2009 Grant Thornton published its annual matrimonial survey in which they asked the question:-

"Will the effect of the economic hardship on relationships lead to a rise in divorces, or, will the plummeting value of property and pensions mean that fewer couples look to split whilst their assets are shrinking?"

The reply was that 48% or respondents to the survey felt that the number of couples filing for divorce would fall and 23% of lawyers believed that the number of divorces would stay at the same level. Grant Thornton's matrimonial survey for 2011 asked a question about the three most common reasons for a marriage breakdown leading to one or both parties seeking a divorce. The response was that 1% of breakdowns were attributable to business problems and 5% to financial/money worries.

In contrast, in December 2011, the dating website for divorcees listed the "Top 10 Reasons for UK Divorces". Heading that list (with a score of 19%) was "Financial issues, arguments over money".

Whichever survey is believed, pronounced financial difficulties can undoubtedly add an unwelcome dimension when couples decide to separate. This is especially so when one of the parties (often the husband) may be on the cusp of bankruptcy. In that situation there may well be a conflict between the interests of the wife and the husband's creditors and acting quickly and effectively may be of enormous benefit to the wife. This often applies most starkly in respect of the family home. That may be owned by one of the parties in their sole name but, more commonly, it will be owned jointly either as joint tenants or as tenants in common.

When a person becomes bankrupt, the whole of his estate vests in his trustee in bankruptcy. That person is then under an obligation to realise the bankrupt's assets for the benefit of the creditors.  The assets will include any property in which the bankrupt has a legal or beneficial interest and this will often include the matrimonial home. If that property is held by the bankrupt and his spouse as joint tenants, the bankruptcy will automatically sever the joint tenancy. The result of this is that the trustee and the other spouse will hold the property as tenants in common in equal shares. Once the trustee in bankruptcy has become a joint owner, he will be able to apply for a sale of the property and any application for sale will be governed by the Insolvency Act 1986. The provisions of that mean that an application for sale is unlikely to be made within the first year of the bankruptcy order but once more than a year has elapsed and an application is made it will be extremely difficult to oppose a sale.

Accordingly, it can often be vital to commence divorce proceedings and related financial claims quickly and progress them expeditiously. The intention is to seek to have the matrimonial court make financial orders on divorce before the other spouse is made bankrupt and his trustee in bankruptcy steps into the fray. Once a trustee is appointed he is likely to apply to have any matrimonial proceedings stayed and so moving quickly can be crucial.

In general, when dealing with financial claims on divorce, the court must take account of the proper liabilities of both parties but it does not have to put the interests of creditors before those of the parties to the marriage and the children. That is very different to how things are viewed through the lens of the bankruptcy court.

The factors that the bankruptcy court takes into account do permit for some degree of discretion as the judge needs to consider the needs of the non-bankrupt spouse and any children but when the application is made more than one year after the bankruptcy order the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt's creditors trump all other considerations. Showing 'exceptional circumstances' is not impossible but can be very hard. Sometimes even demonstrating severe ill health will only be enough to secure a stay of the axe falling.

Obtaining a financial order, for example that the husband transfer to the wife his interest in the family home, may not be enough as there are circumstances where the trustee in bankruptcy can seek to have that transfer set aside but in that situation the wife may well be in a much stronger position than if she simply waits and finds that a trustee in bankruptcy is appointed and takes steps to sell the family home.

Whether or not the trustee in bankruptcy will be successful in having the transfer set aside will depend upon an examination of the circumstances that exist. If it is obvious that the transfer was entered into simply to defeat the claims of the creditors then the transaction will doubtless be set aside as being at an undervalue. If, on the other hand, it is clear that the order was made after a careful examination of the relevant factors that the matrimonial court has got to take into account, it might be more difficult for the trustee in bankruptcy to establish that the transaction was at an undervalue.

Irrespective of any application within divorce proceedings, it is important to establish the extent of the parties' respective interests in the property. It is, after all, only the interest of the bankrupt which vests in his trustee in bankruptcy. It is therefore necessary to look to see whether or not there is anything that can enable the non-bankrupt spouse to argue for a greater share in the property.

Where the legal estate is owned by the bankrupt solely the presumption will be that the other spouse does not have a beneficial interest in the property. That presumption is, however, rebuttable and it may be possible to successfully argue that the property is held on trust for both parties. The burden will, nonetheless, be on the person asserting the interest to satisfy the court that there was a common intention that she would have an interest in the property.

Where the property is owned jointly again the presumption will be that the interests are equal but, again, it may be possible to persuade the court that there was, in fact, a common intention that the property would be held in unequal shares. 

In every case therefore it will be necessary to look carefully into the discussions that took place when the property was acquired, to examine how the purchase was financed and how the spouses paid the outgoings and other expenses. It may also be fruitful to examine how any improvements to the property were paid for and how mortgage repayments and other household expenses were dealt with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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John Darnton
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