A spouse is declared bankrupt during divorce proceedings: what now?
In a divorce, the parties mainly expect discussions about maintenance, the division of assets and the care of any children. But what if a sudden, drastic, financial turn of events occurs, namely the bankruptcy of one of the spouses?
This article examines the consequences of bankruptcy during divorce proceedings. What happens to the division of marital assets? How can the position of the non-bankrupt spouse be protected?
Bankruptcy and divorce
This situation not only brings uncertainty, but also raises complex legal questions that can significantly influence the course and outcome of the divorce. Bankruptcy directly affects the financial settlement of the marriage. Consider the division of the matrimonial property, the position of creditors and the extent to which the other spouse is affected by the bankruptcy. Furthermore, a conflict arises between family law and insolvency law: two areas of law, each with their own rules and interests.
Bankruptcy during marriage
If one of the spouses is declared bankrupt, that spouse generally loses control over their assets and the right to dispose of (sell) them. These assets form part of the estate of the bankrupt person and come under the administration of a trustee.
A key issue is whether and how the matrimonial property can still be divided in such a situation. The first question here concerns the type of matrimonial regime under which the parties were married. In the Netherlands, the most common forms are total community of property (if you were married before 2018) and limited community of property (you were married after 1 January 2018). However, prenuptial agreements can also influence the settlement.
Total community of property
Where the parties are married under the total community of property regime, bankruptcy has the most far-reaching consequences. Total community of property means that all assets and debts, both before and during the marriage, of both partners automatically become jointly owned. All assets of the community are then included in the bankruptcy under the Dutch Bankruptcy Act. This means that all joint assets may be sold to settle the debts of the bankrupt spouse. The non-bankrupt spouse is directly affected by this, even if they have not incurred any debts themselves. Exceptions to the total community of property are inheritances received by the non-bankrupt spouse or highly personal assets, which by law may be excluded from the community.
Limited community of property
If you are married under the limited community of property regime, assets and debts acquired before the marriage remain private, whilst everything acquired during the marriage becomes joint property. The bankruptcy trustee will need to investigate which assets form part of the joint estate and cannot simply sell everything. For example: if you bought a house before the marriage and your bankrupt spouse lives with you, this is a private asset and remains safe from the bankruptcy. However, the joint savings account you built up after the marriage does fall within the community of property and will be used to satisfy the creditors.
Pre- or postnuptial agreements
With a prenuptial or postnuptial agreement, the other spouse is usually more protected. For many entrepreneurs, this is precisely the reason for entering into a prenuptial agreement. On the one hand, their own assets are protected, but on the other hand, the negative consequences of bankruptcy are limited in as much as possible for the other spouse.
Whether a community of property or “separate property” has been agreed depends on the terms of the prenuptial agreement. The bankruptcy trustee will investigate the consequences of the prenup. In a divorce, it may be relevant whether the bankrupt spouse has a claim against the non-bankrupt spouse. Suppose the bankrupt spouse has paid €10,000 in renovation costs on behalf of the other spouse; in that case, a right to reimbursement arises and the trustee may claim this, even if the other spouse might prefer not to.
Legal consequences of bankruptcy
Under the law, the matrimonial property forms part of the bankrupt estate, insofar as it has not yet been divided. This means that the trustee takes over the administration and liquidation of the matrimonial property, acting in place of the bankrupt spouse. The non-bankrupt spouse does retain his or her rights, but can only assert claims within the bankruptcy as an unsecured (i.e. lower-ranking) creditor.
In the case of total community of property, creditors may also apply directly to the other spouse for payment. In that case, the other spouse will usually receive only a claim of little or no value to the extent that he or she pays more than 50% of the debt to the creditor.
The divorce agreement in bankruptcy
The bankrupt spouse loses the power to enter into legal transactions during the bankruptcy. The bankrupt spouse will therefore not be permitted to enter into a divorce agreement without the administrator’s cooperation. The bankrupt may only exercise ‘strictly personal’ rights. The bankrupt spouse may, however, file for divorce and may also agree on a parenting plan in the interests of any children. Bear in mind, however, that any child maintenance can only be budgeted into the income to be left at the disposal of the bankrupt spouse with the approval of the insolvency judge. This will need to be applied for in consultation with the bnakruptcy trustee or administrator.
Right of recovery by the non-bankrupt spouse
The spouse that is not bankrupt is often in a vulnerable position. This is certainly the case if the parties are married under a regime of community of property. The non-bankrupt spouse may then face the loss of joint assets, such as the house or savings.
In some cases, it can be demonstrated that certain assets are private property and are therefore excluded from the bankruptcy estate. The non-bankrupt spouse may then ‘take' these assets back from the estate. However, it is important that you can prove that an asset is private. It is important to keep proof of purchase, bank statements and records of your private assets. If you have received an inheritance or a gift, keep separate records of this to prevent it from being drawn into the bankruptcy.
Points to consider in the event of simultaneous divorce and bankruptcy
A divorce occurring at the same time as a bankruptcy creates a complex situation. It is therefore vital to seek legal advice promptly. Some points to consider are:
- Assess the matrimonial property position as soon as possible;
- Determine which matrimonial property regime applies;
- Communicate with the bankruptcy trustee in good time and provide evidence of the origin and ownership of assets;
- Consider the options available within both the divorce and bankruptcy proceedings. To dissolve the total community of property, the non-bankrupt spouse can, for example, renounce all rights to and terminate the community of property;
- By filing for divorce or legal separation if you are married under a community of property regime, you can ensure that future income of the non-bankrupt spouse is not included in the bankruptcy estate.
Bankruptcy or statutory debt restructuring scheme?
Much of the above also applies if your soon-to-be ex-spouse is declared eligible for the Dutch statutory debt restructuring scheme (WSNP). However, different rules may apply in that case. In any case, is essential that you seek advice at an early stage.
How can Bowmer & Nuiten help you?
Are you the spouse of a bankrupt person and do you need advice on your legal position and what you may and may not do in relation to the bankruptcy trustee? We would be happy to advise you on this. We have an experienced team of lawyers specializing in both family law and insolvency law who are ready to assist you in regaining your rights to property or other disputes with the bankruptcy trustee.
For further information or questions regarding this article, please feel free to contact Selma Akitürkmen or Maria Bowmer.
