Frances Gibb, Legal Editor
We've made some changes
to The Sunday Times
Thousands of divorcees risk seeing their assets plundered to meet their former spouses’ debts after a landmark ruling that they are no longer protected from his or her creditors when they split.
A High Court ruling released yesterday has closed the loophole protection that spouses enjoy over their share of assets ordered on divorce.
In future if a husband — or wife — goes bankrupt, their spouse will be exposed to creditors over assets won in a contested divorce. Bankruptcy trustees will be able to pursue the nonbankrupt spouse for up to five years. The ruling also applies retrospectively to divorce orders within the past five years.
The ruling by Judge Pelling, QC, sitting as a High Court judge, came last week in a case in which a couple, David and Wendy Pearl Haines, jointly owned a property called Strudges Farm near Stourport-on-Severn, Worcestershire. They were described by the original judge in the case as having been “extravagant in the acquisition of the house, horses and cars” and having lived “beyond their means”.
In 2003 the wife petitioned for divorce and in a court settlement her husband was ordered to transfer the house to her. She was not granted a lump sum because of the risk, the judge said, that the husband might become bankrupt in the near future. In March 2005 the husband petitioned to be declared bankrupt with total liabilities estimated at £132,000.
The bankruptcy trustees sought to set aside the divorce order at Birmingham County Court but their challenge failed. Yesterday’s decision was their appeal against that ruling.
The High Court ruling means that Mrs Haines could be forced to give back her husband’s share of the house, unless he has discharged his debts and they agree otherwise.
The legal argument focused on whether a court order in contested matrimonial proceedings could be defined as a “transaction” for the purposes of the terms of the Insolvency Act 1986 and whether a property adjustment order amounted to valuable consideration.
John Bangham, director at the accountancy firm KPMG, said: “This is an extremely important case. It will change the face of divorce settlements where the prospect of bankruptcy is a real likelihood.”
Lawyers predicted yesterday that trustees in bankruptcy would now start “rummaging through their files” to see whether there were assets in a divorce case that they could now proceed against. The decision is predicted to affect at least 20 per cent of the 120,000 people expected to file for bankruptcy this year.
Gareth Schofield, a partner and family law expert at Clarke Willmott, the firm that brought the test case, said: “This is a complete reversal from the widely accepted position that divorce settlements made by the matrimonial courts after a fully contested hearing are beyond reach in bankruptcy cases and cannot be overturned by a bankruptcy court. This decision will have a profound effect on the way clients are advised on settlement in divorce where bankruptcy is a potential issue.”
He added that it was “potentially bad news” for wives who had reached court-ordered divorce settlements that they had thought were watertight.
Some divorcing husbands might be tempted to use the threat of bankruptcy as a weapon, Mr Schofield said, particularly now that the stigma had been reduced because people could discharge bankruptcy after one year. But he said: “To be honest this already happens — and it is a double-edged threat because bankruptcy, while not regarded as it used to be, still carries disadvantages.”
Martin Askew, an insolvency partner in the firm, said: “If people try to readjust their assets between themselves so as to protect them against creditors, then bankruptcy trustees have always been able to go against them. The difference now is that, if they made that readjustment and it was then endorsed in a court order in contested divorce proceedings, they could frustrate their creditors. That is no longer the case.”
Splitting up
Between 2004 and 2005, divorces granted in the UK fell by 7 per cent to 155,052, from 167,138
This is 14 per cent lower than the highest number of divorces, which peaked in 1993 (180,018)
The number of divorces in England and Wales (141,750), Scotland (10,940) and Northern Ireland (2,362) fell in 2005 by 8 per cent, 3 per cent and 6 per cent respectively
Sources: ONS; General Register Office for Scotland; Northern Ireland Statistics and Research Agency; CAB
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I am a 15 year old child stuck under the situation of this. It makes me sick that my father is able to do this, it is not stealing from the wife but also the childern from the marriage.Shame on you who made this law, i'm turning 16 in 1 week time and instead of spending one of the most important birthdays with joy, i must help my mum other come this, i have to now suffer from this new order.
elsden, plymouth,
What an excellent and equitable solution to the biase of the Family Courts. I am currently in the death throws of a messy contested divorce where the ex (on legal aid all the way) has left me with horrendous legal bills fighting custody of our children. I could be left with no equity from our matrimonial home as it will be transferred to her for a clean break, yet will have to stay on the mortgage and thus have difficulty in buying a new home. How ironic that she will be faced with paying my legal fees out of her ill gotten gains............now where did I put my credit cards!!
Dave, Stockport,
I agree with Anna B of Tunbridge Wells - SHAME ON U JUDGE PELLING - It makes you wonder what 'old school' this man comes from. How on earth can he reason that an ex-wife who has struggled to keep a roof over her childrens head with no support whatsoever from her ex-husband financially or otherwise then be liable for debts he has incurred after they are divorced - it is totally and utterly beyond belief - it just gives men the right to do what they want when they want and still come out smelling of roses. The law as far as I'm concerned is an ass - a male chauvanist organisation that hasn't got a clue.
walker, Redhill,
I hope that Mark Keena (above) is right. I can see that as a result of this ruling, my ex husband ia already beginning to let hus debts pile up. This ruling is not only absurd, but cruel. I divorced so that I could move on and give my children a better life. My ex husband did well out of the settlement, but now it seems that he can also use my share of the very small assets that we divided too. I hope that this ruling is challenged and overturned soon, and that common sense will prevail. Otherwise, what is the point of divorce,if one is still tied to and working to support an ex husband in this way.
Hughes, Herts,
One of the reasons I divorced my ex was because of his financial irresponsibility - he became unemployed and decided to spend time travelling and spending money rather than looking for work, often with women he had met on the internet ! ! thus getting into considerable debt. I have spent the last 3 years back and forth to court with expensive legal costs, not to mention the stress and emotional drain incurred and am now being told that this could be a waste of time and I may have to pay for my ex husbands debts - I'm sorry - this is absurd !
Diane, Lincoln, UK
What about the effect of this ruling on the stability of raising children? Apart from not having any/litte assets left to move on with their residing parent, for 5 years their newly established life could be torn apart over night - in fact they could be made homeless in the first place because there might be nothing left to move on with.
Is that what we call the circumspect ruling of a judge in a civilised society where humanity towards the most vulnerable should be paramount? There will be many wives and some husbands out there who are trying to make a difficult marriage work for the sake of the children and family in general just to be catapulted into the gutter
to feed the golden calf should it come to a divorce. And the homeless children will have to be picked up by the taxpayer with their broken hearts and souls as our future adults - incurred in childhood. A divorce is already a very traumatising experience. This ruling adds insult to injury . Shame on Judge Pelling!!
Anna B., Tunbridge Wells, Kent
This is not as clear as it might seem. The trustees can only win if they can show that the order was made because a party was reasonably likely to be bankrupt at some time in the future. The judge in the first case made the order because he was at risk of bancruptcy.
If an order is made and at the time there was no prospect of bancruptcy but then later a party becomes insolvent, the trustees would not be able to go against an order as it was not made to avoid the assets being avaliable to the trustees. I hope that makes sense.
Mark Keenan, Swindon, England
Another nail in the coffin for marriage.
Melanie Archer, WImbledon, UK
I note that the ruling deals with 'Contested' divorces, what about non contested divorces?
John Tustin, Redditch, England
I wonder what happens if you get divorced, the ex then goes on a spending spree and then goes bust ? This judgement seems fair enough about debts incurred during the marriage, but will it apply to debts after/independent of the marriage ?
Financial irresponsibility can be a factor in the divorce in the first place. Is it fair for you to continue to be responsible for a profligate ex after divorce - where it has probably already cost you a lot to repay the debts that they ran up while you were married?
alain, watford, uk
this ruling is definately not a good idea. i do think a clean break financial settlement should be promoted rather than exposing the other spouse to this kind of "frustration" and "uncertainties". if a couple is in the stage of getting a divorce, except in the case of custody of children, everything should be divided properly to avoid future "contact"
vic, nottingham, nottinghamshire
Unless there is convincing evidence that the divorce took place in order to protect the assets from creditors, this is an outrageous case. Are we to continue to make retrospective changes in the law? Britain - the place where pre-nup contracts are unreliable, where 'anonymous' sperm donor cntracts are unreliable, and donors find themselves named later, and now this - divorce settlement contracts torn up by a judge. "A man's word is his bond." Not in the UK. Not even his boind either, anymore, it seems.
Nick, Rotherham, UK
Shouldn't it depend on when (and how) the debts were incurred? If before the divorce, then perhaps both partners were equally extravagant, but if afterwards (as in the case of a friend of mine whose husband started a spending marathon with various girlfriends as the lawyers worked their way slowly through the case) then the resonsibility is surely not equal?
jane, faro, portugal
Good! In a marriage you both contribute and on divorce split everything 50:50 as should debts. I'm sure some will think twice before trying to jump a sinking ship and perhaps wrk harder at their relationship.
John, Hertfordshire,
In a word - Unbelievable
PB, YORK,
If two people spilt assets in a divorce in good faith, then holding a divorcee responsible for his/her ex seems unfair.
While the case cited in the story lends itself to supporting the ruling, there are likely many people who will be affected through little fault of their own.
That being said, I actually do not know what the law is in my state - US divorce and bankruptcy laws vary from state to state) .
Tom Canick, Rockville, Maryland USA
Does this ruling aplly to uncontested divorces?
John Tustin, Redditch, England
"With all my wordly goods I thee endow."
Edmund Burke, Kingston upon Thames, England
Its no wonder couples are thinking twice about getting married every month or so the rules change if the government want family life they need to look at the possible fallout after all there is enough pressure to keep family life ticking along nicely without added concern in case it goes pearshape .
nigel, ryde,
a very interesting decision ???
if the couple stay married the creditors cannot seize the partners assets but can if they divorce ??
seems a bit topsy turvy ??
it seems the judge could not see the wider implications where a court order is not acourt order
paul harris, london, uk
How about it being fair to the spouse to which it effects? Moreover perhaps it is a poorly adopted concept in the US? How can it be fair and equitable that one spouse should live in fear for a period of upto 5 years following an order from the courts on divorce that should their former spouse be declared bankrupt the agreement reached as to finances can, conceivably, be undone by a trustee in bankruptcy.
Bob , London , England
We have had this reaching concept in the US for years, it is only fair to the creditor.
KMW, Miami, Florida, USA