How does bankruptcy affect a spouse?

The question of what effect personal bankruptcy will have on a spouse is a very common one for couples. Licensed insolvency practitioner, David Kirk explains the complexities.

Can personal bankruptcy affect a spouse?

If you file for bankruptcy, it may still affect your spouse in various ways. When a person is made bankrupt, they will automatically have a Trustee in Bankruptcy appointed over their estate. The Trustee's job is to realise the assets of the bankrupt person to pay off as much of the debts as possible. The first point to be clear on is that assets owned solely by a non-bankrupt member of a couple cannot be taken to pay for their spouse’s debts.

However, this can become more complicated and very emotional where jointly owned assets are involved. For example, couples will naturally not want to be evicted from their family home (whoever owns it). Therefore, in any situation, couples will need advice on the complex rules relating to bankruptcy and what can and cannot be touched by a Trustee in Bankruptcy.

How does bankruptcy affect a family home?

The most common joint asset is the family home. The Trustee will arrange for the property to be valued and work out the likely equity. In that calculation they must allow for any mortgages and sale costs. It is usual to assume the asset is owned 50:50 unless there is something else in writing such as a deed of trust.

It is worth reviewing this calculation quite carefully. One common issue missed is the equity of exoneration. If your spouse has raised funds on the property to invest in a business this must come off their half share. In addition, if you have put in different amounts as the deposit this may be reflected in the equity split.

It may be possible to agree with the Trustee to buy out a bankrupt spouse’s share of the equity. The Trustee would usually prefer to do this than force a repossession and sale to save time and costs. A small discount may also be given to the non-bankrupt spouse for reaching this type of agreement. Usually the mortgage company, if you have one, will not take any action so long as the interest continues to be paid.

Usually, if the Trustee is ignored, then after one year they will start proceedings for possession. The Trustee has three years from the date of bankruptcy to start this process.

How does bankruptcy affect a spouse’s assets?

The Trustee will only be interested in high value assets. They are not interested in everyday household possessions and furniture. If a spouse has a jointly-owned car, if it is low value usually the Trustee will allow he/she to keep it if needed for work.

The Trustee can apply for an Income Payments Agreement, if the bankrupt has surplus income, which can be a monthly payment for up to three years from a bankrupt person’s income. Whilst they cannot claim this from the non-bankrupt spouse, they can take account of a spouse’s income and the household running costs to work out what a bankrupt individual can afford to pay.

It is worth noting that if an individual has transferred any assets to their spouse prior to bankruptcy these may be able to be recovered by the Trustee as a transaction at undervalue (two-year time limit) or as a transaction defrauding creditors (no time limit).

How does bankruptcy affect a spouse’s credit rating?

The bankruptcy of a spouse should not affect a non-bankrupt spouse’s credit rating. However, as the bankrupt spouse will be listed at their non-bankrupt spouse’s address, it often has an effect on both parties’ ability to gain credit.

If couples have joint assets I would always recommend taking some professional advice before agreeing to a final settlement with a Trustee in Bankruptcy. It is a complex area of the law and it is important to make sure the agreed settlement is fair to all parties.

Where can I see insolvency notices in The Gazette?

You can view all corporate and personal insolvency notices on The Gazette website.

The Gazette also provides a data service which gives access to official intelligence on all UK businesses, corporate and personal insolvencies. Benefits of The Gazette’s data service include:

Bespoke reports - tailored around your specific business
Geo-targeted editions - available for specific geographical targeting (National, London, Belfast, Edinburgh)
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For more information on The Gazette’s data service, contact the team on 01603 985949 or email data@thegazette.co.uk.

David Kirk