Divorce and Bankruptcy: The Final Straw

Divorce and Bankruptcy: The Final Straw

Divorce and Bankruptcy: The Final Straw 1080 716 Alfred Ip

Distressed financial situations often push a marriage to divorce.  Alternatively, divorce can lead to dramatic effects on someone’s financial status.

One of the common questions that we receive from our clients is: how would my spouse’s insolvency affect me if I were to file for divorce?

Split of matrimonial assets

We have highlighted in our previous article – Family Focus Week: 101 on Division of Assets in Divorce Proceedings – that under common law principles, the starting point for assets division is a 50/50 split, unless there are good reasons for departing from an equal division.  In a similar manner to the division of assets, the division of matrimonial liabilities in divorce proceedings also follow the general rule of a 50/50 split.

Effects of bankruptcy on divorce

The following concerns are common for couples entangled in bankruptcy and divorce proceedings:

If my spouse is declared bankrupt, can I claim spousal support from him/her?

Yes. The finances of a bankrupt are controlled by the trustee in bankruptcy (“Trustee”).  All assets of the bankrupt, if there are any left, will be “confiscated” by the Trustee for debt satisfaction.  All income of the bankrupt, after deducting necessary personal expenses, will be used for debt repayment as well.  Personal expenses include financial support of dependants.  In other words, if your spouse is bankrupt and he/she continues to enjoy an income, you can claim spousal support from them and their income will be applied on your financial support before being used to repay their debt.

However, the support of the dependants must be at a reasonable level and within their means .

If the Insolvent Party is declared bankrupt, will my assets be at risk?

If your assets are your own hard-earned money, and your spouse is declared bankrupt, your spouse cannot claim against you for a split of the family wealth without seeking approval from the Trustee in bankruptcy.  Any proceeds from such claim will be used to repay debt, so the bankrupted spouse would not receive any personal benefits.  It is doubtful whether the bankrupted spouse would be interested in such a claim in that case.

However, if the bankrupted spouse does not have an income, he/she can still claim against you for spousal support for his/her own financial needs.

Moreover, if you received any assets from your spouse at undervalue before they were declared bankrupt, such assets could be clawed back by the Trustee in bankruptcy.

What will happen to shared assets if my spouse is declared bankrupt?

Family members will not be required to take responsibility for the bankrupt’s indebtedness.  However, if there are assets such as property or bank accounts which are held jointly, the bankrupt’s share of the property or bank account may be realised or drawn off to pay the debt.

We are going through divorce, and the matrimonial home is in my spouse’s sole name; he/she has also just been declared bankrupt. Will I be forced to leave the matrimonial home?

If the matrimonial home is under the name of the bankrupted spouse, it will form part of the assets that would be realised by the Trustee-in-bankruptcy for debts repayment.  In other words, chances are that you would be evicted.

However, if you can assert beneficial or equitable interest in the matrimonial home, you can make a claim against the bankrupted spouse for a share in the matrimonial home.  Whether you can assert such beneficial interest depends on circumstances, such as whether you have made any contribution towards the matrimonial home, either direct monetary contribution or indirect contribution such as its renovation or improvement.

What if the matrimonial home is under joint name? How would it affect my interest in the matrimonial home?

If the matrimonial home is under joint name, you should consider asking for an order that the matrimonial home be sold with the proceeds to be split equally, and the share of the bankrupted spouse will be in the hand of his/her Trustee.

If the acquisition of the matrimonial home is fully funded by you, you may wish to claim that your bankrupt spouse has no interest in the matrimonial home, and accordingly his or her share should be transferred to you instead.  Whether such a claim would be successful or not depends on the circumstances.

Alternatively, subject to the consent of the trustee-in-bankruptcy, you may consider buying out your spouse’s share in the matrimonial home.

How about if the matrimonial home is under my name, and my spouse is an adjudged bankrupt?

Based on the above principle, if your spouse is not claiming any interest in the matrimonial home, your home would not be at risk.

Should divorce or bankruptcy come first?

If you are concerned that your spouse is heavily indebted and may become bankrupt soon, you should consider filing for divorce without delay.  Bankruptcy proceedings may cast uncertainty to the divorce proceedings, especially when there are hostile creditors who wish to claim against any assets that your spouse may have or have disposed of. Furthermore, divorce proceedings would be automatically stalled if a bankruptcy order is issued against a party.

On the other hand, by settling divorce proceedings before bankruptcy, it is less likely that the Trustee will attempt to claw back any of the non-bankrupts’ assets in bankruptcy proceedings, if they have  been distributed by the Court during the asset division in divorce. Additionally, as it can range between 4-8 years before a bankruptcy order is discharged, the bankrupt’s ability to pay [alimony] may be reduced.

Bankruptcy Procedures

The key legislation in Hong Kong regarding bankruptcy is the Bankruptcy Ordinance, Cap. 6 (“the Ordinance”). The Ordinance provides an alternative to filing a bankruptcy petition: applying for an Individual Voluntary Arrangement (“IVA”), which may be made by a debtor or an undischarged bankrupt. A repayment proposal must be submitted to the bankruptcy court and creditor, laying out a realistic plan generally by way of installments that resolve the dire financial situation in a shorter time. If approved by the court, creditors will not be able to sue you in court so long as the repayment plan is respected. An application or IVA may be preferable as it confers advantages:

  • (i) one can avoid the stigma and adverse effects of bankruptcy, bankruptcy orders granted by the Court will be advertised in the Gazette and two newspapers;
  • (ii) a bankrupt may not be able to practice in certain professions, such as insurance or estate agents, whereas the same does not apply to IVA and;
  • (iii) bankruptcy imposes legal restrictions under the Ordinance, which do not apply to an IVA.

If an IVA is not feasible, you may file for bankruptcy by following the rules and regulations set out in the Ordinance. Creditors may also petition for bankruptcy if the debtor fails to stand up to his/her payment obligations. Once the Court has granted a bankruptcy order, the debtor’s assets will be vested in a Trustee, who will liquidate assets to fulfill credit obligations. The Court will also investigate the reasons why an individual has become insolvent and may punish them if they are found to have breached provisions imposed in the Ordinance. Once a bankruptcy proceeding has begun, the debtor and his/her assets are protected from involvement in any other court proceedings.

Bankruptcy orders for first-time bankrupts will be discharged 4 years after the date of issue, provided that the creditors do not object and the bankrupt has fully complied with the provisions of the Ordinance. If the individual has previously been declared bankrupt, the order will be discharged automatically in 5 years. Should the Trustee or creditor satisfy the Court that the bankruptcy should not be discharged, an extension of 4 years shall be granted to a first-time bankrupt, or 3 years for someone who has previously been declared bankrupt.

Our take

Preferably it is advisable to agree about financial matters before the bankruptcy proceedings starts.  Rapid action and an application prepared by an experienced solicitor may allow suitable orders for financial settlement to be made before a bankruptcy takes effect.

Bankruptcy can still have serious implications for the financial settlement of a divorce, and legal advice should always be sought in circumstances where the bankruptcy of one of the parties is an existing or possible risk.

 

Our team at Hugill & Ip has extensive experience in dealing with Family law issues – so kindly get in touch with us to find out how we can help.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Alfred Ip

Alfred Ip

Alfred assists high net-worth individuals (HNWIs) in handling their wealth-related issues, such as contentious and non-contentious trust and probate, mental capacity, family office, amongst other wealth management matters. He is also a leading Dispute Resolution lawyer with over 20 years of experience in Hong Kong. Moreover, Alfred helps clients with issues regarding Family Law.

All articles by : Alfred Ip
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