Protecting the family Home: orders for sale, bankruptcy and divorce by guest blogger Ellie Webster
March 2, 2012 86 comments
In these tough times, cash-strapped spouses may find themselves at the receiving end of an application for an order for sale of the matrimonial home, made by a secured creditor such as a bank.
Where the debtor spouse is not bankrupt, the court must consider the statutory guidelines set out in Section 15 of Trusts of Land and Appointment of Trustees Act 1996 in deciding whether or not to make an order for sale. These guidelines provide the debtor and his or her spouse with some “teeth” with which to challenge the application if the property is jointly owned.
What the court must consider
Firstly, the court should look at the intention of the parties and the underlying purpose of the trust of land. The parties have the option of using the argument that, where the intention was to provide a matrimonial home and that purpose remains (i.e. the parties have not separated), the application should be refused or the order for sale postponed at the least. This is even more likely to be the case if a couple has children under 18 who live with them. The court took a more generous approach in the 2004 case of Edwards v Lloyds TSB Bank Plc  EWHC 1745, noting that even though the couple’s marriage was over the “purpose” survived because the wife was still living in the house along with the couple’s two children. The sale was therefore postponed for a period of five years until the daughter reached the age of 18.
Other factors that should be considered by the court include whether there are other assets available to pay off the debt, the amount at stake and the likelihood of repayment – as well as the availability of alternative accommodation. While the court would expect that an order for sale will naturally force the parties to “downsize”, it may well be postponed when there isn’t enough money for the non-debtor spouse to move into an alternative home. In exceptional circumstances, the ill-health of either spouse may cause the court to refuse or postpone the order for sale.
Those presented with an application for an order for sale should take some comfort in the fact that the order should not be granted automatically without the court considering the above factors. As ever, the recipient should take robust legal advice, and ensure that he is doing everything in his power to show the court why the order should not be made.
If proceedings have commenced
But what happens when divorce proceedings have commenced, and the debtor spouse is declared bankrupt?
In brief, the net effect of a spouse being declared bankrupt is that “their” assets no longer belong to them. They are owned instead by the trustee in bankruptcy. As a result of the bankruptcy a conflict will inevitably arise between the interests of the trustee and creditors on one hand, and those of the bankrupt and their (soon to be ex) spouse as well as any children, on the other hand. The effect of that is that if, for instance, the former matrimonial home is owned jointly, the house cannot be transferred into a spouse’s sole name without the trustee’s consent. This is only likely to be given if the spouse can buy the bankrupt’s share at a reasonable market value. Where the property is held in the bankrupt’s sole name, steps should be taken immediately to register the non-bankrupt spouse’s matrimonial home rights at the Land Registry. These rights will then be binding on the trustee, although they have the power to apply to court to terminate them.
Regardless of the outcome, the non-bankrupt spouse does have a grace period of 12-months in which the home cannot be repossessed, which should provide time for long-term arrangements to be made.
A divorce “tactic”
The impact of a declaration of bankruptcy is so serious and far reaching in divorce proceedings that it is not unknown for one party to use bankruptcy as a tactic. I am sure most family lawyers will have heard on more than one occasion: “Fine, let them do what they want. I’ll just go bankrupt”. It is therefore vital to try and reach an agreement and have it approved by the court before the bankruptcy takes effect. If the bankruptcy is already in effect, it may be possible to apply to annul it if the bankrupt is not in fact insolvent.
The impact of a bankruptcy order will depend on when along the timeline of the divorce and ancillary relief proceedings it is made. If a bankruptcy order is made before a consent order is approved and decree absolute pronounced, then any agreement as to finances is at risk. The trustee in bankruptcy can apply to reverse any transactions made in anticipation of that agreement. If the bankruptcy order is made once the consent order has been made but not yet implemented, a transfer of property order should be enforceable against the trustee (as the spouse will receive an equitable interest in the property ordered to be transferred at the date of the order).
Bankruptcy has the potential to severely alter the playing field in a divorce, and what might have started as a classic case for division of the matrimonial assets to meet the parties’ housing needs, may be suddenly complicated by the appearance of the trustee in bankruptcy – and his queue of creditors. Our advice would be that where there is a risk of bankruptcy, thorough financial disclosure should be undertaken and the necessary enquiries made before the court is asked to make any order which might be reviewable later on. It may be necessary to ensure that the potentially bankrupt spouse signs a declaration of solvency.
Every effort must be made to reach an agreement at the earliest possible opportunity, particularly to safeguard your position in relation to the matrimonial home, and court approval of the financial agreement should be sought without delay. Above all, spouses and solicitors should be alive to the possibility of bankruptcy in every case and should be prepared for prompt action. In doing so it may be possible to protect the interests of the non-bankrupt spouse. As ever, divorcing spouses should take professional legal advice as the complexities of these situations demand an experienced approach.
Ellie Webster graduated from the University of Bristol with a first class degree in Law and French in 2005. She went on to complete her Legal Practice Course at Nottingham Law School and joined Stowe Family Law upon qualifying as a solicitor in 2009.
March 2, 2012
Categories: Finances and Divorce