Law Articles

Bankruptcy and Divorce Proceedings 17/12/2011

The case of Mekarska v Ruiz and another (2011) shows how bankruptcy can affect divorce proceedings.

The Husband was age 51 and the Wife age 40. They married in 2001 and had one child. Both parties were on state benefits when the marriage ended in 2006. Soon after separation, the Husband ran up large debts at banks and on credit cards equal to about one fifth of the family means. The debts were unsecured. In 2007, the Husband petitioned for his own bankruptcy as he was unable to make the repayments on the loans. The court made the bankruptcy order without notifying the Wife. At the time of the bankruptcy, the Husband’s assets included the matrimonial home (which was in his sole name) and a trading account. The value of the family home was in the region of £279,000.00 and the trading account contained about £18,000.00. The Wife and the child lived in the former matrimonial home. Against these assets, the Husband had liabilities of £66,000.00. The Husband was clearly not balance sheet insolvent but the court accepted that he was unable to pay his debts as they fell due.

A consequence of the bankruptcy was to vest the Husband’s assets in the trustee of bankruptcy. In February 2008 a partner at PricewaterhouseCoopers (PwC) was elected as trustee in bankruptcy and the Wife only found out about it in March 2008. The Wife applied for an annulment of the bankruptcy order in September 2009.

The Wife issued financial relief proceedings in October 2007 and the hearing concluded in November 2008 (some 10 months before the Wife applied to annul the bankruptcy order). The judge ordered that the Wife receive a lump sum, equal to the entire surplus after the bankruptcy debts and costs were paid, from the net proceeds of sale of the former matrimonial home and the remaining capital of £18,000.

The Wife was unable to obtain the projected sale price for the property so she withdrew her cooperation and the trustee in bankruptcy issued repossession proceedings. The Wife issued an application to annul the bankruptcy and appealed the financial remedies order but the matter did not come before a judge until March 2011.

At the time of the hearing in March 2011, the initial debt of £66,000.00 had risen (due to interest and other costs) to £260,000.00.

The Wife’s application to annual the bankruptcy order was dismissed. The Wife’s appeal in relation to the financial remedies proceedings was also dismissed.

Litigation, especially where bankruptcy is an issue, is very expensive and best avoided if at all possible. Had the parties reached an agreement about division of family assets before court proceedings were issued, they could have preserved the majority of the net proceeds of sale of the family home enabling them both to re-house themselves. As it happens, the cost of litigation wiped out their assets.

If litigation is the only way, applications to annual or suspend bankruptcy orders should be made as soon as possible to avoid the costs of bankruptcy eating into the family assets as they did in this case.

For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation on 01992 306 616 or 0207 956 2740 or email us.

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