Bankruptcy - how does it affect the family home?

For the majority of married couples, their main asset is their home and it is usually owned jointly. If one of them becomes bankrupt, their half share in the home passes to the Trustee in Bankruptcy, who seeks a sale to pay the bankrupt partner's creditors. It is important to consider how the possibility of bankruptcy will affect the ownership of the family home.

If there is a chance that one party may be declared bankrupt in the future, this should be urgently considered as part of the financial proceedings that form part of divorce.

The insolvent spouse will need to cooperate to maintain the family home for the benefit of the solvent spouse and the children. Simply transferring the half interest of the potential bankrupt, without full payment of its value in return, would be challenged by the Trustee and set aside on the basis that it was a transfer at an undervalue under s339(3) of the Insolvency Act 1986.

For the non bankrupt spouse to be protected against a transfer at undervalue claim by the Trustee, certain criteria must be fulfilled before the bankruptcy order is made. These include the following:

• The order must have been made

  This means that that the agreement to transfer the property to the other spouse must be made into an order of the court (whether by consent or the result of a court hearing).

• Some consideration must have been made by the solvent spouse

  This may mean, for example, the 'receiving party' agreeing to receive no maintenance.

• Decree absolute must have been made

  The divorce must be final.

• There must be no dishonest collusion

  Dishonest collusion between the husband and wife is hard to prove unless there is fraud, it does not, it appears, occur simply as a result of agreeing an appropriate financial settlement for the benefit of the family which as a result safeguards the family home against claims by the Trustee.

Even in the most bitter divorce disputes the potential bankrupt would usually rather see their former spouse and children with the home than see it disappearing to other creditors.

Be warned - filing for bankruptcy before the criteria above are fulfilled will scupper all the planning - so you must act quickly.

Contact us:

For further advice on family and matrimonial issues, please contact a member of our family team.

Download Article:

Click here or click on the image at the top of the article to view as a pdf.

Published:

25 March 2011