Divorce and debt: Protecting spouses rights in Scotland
Author: Marika Franceschi
A recent judgment in the Scottish Court of Session has underlined the need for couples who are divorced or separated to ensure that their interests are adequately protected against any financial difficulties their former partner may experience.
This article relates to the law in Scotland only and may be of interest if you are in England or Wales.
The case involved a wife seeking to overturn a decree for repossession of the home she had lived in since 1978. The home was in the sole name of her former husband (who lived elsewhere), and had never been transferred to her. A mortgage had been granted in 1986 and appears to have been in arrears for around 10 years. The judgment suggests that the former husband ought to have been servicing the loan.
Due to the arrears, the lender raised an action for possession of the property. As a former spouse, with no right of ownership over the property, she was unable to enter that action and make representations.
The court therefore had little choice in the circumstances but to award decree. In a judgment which makes clear the high degree of sympathy the court had for her position, the Court of Session agreed that the wife had no right to oppose the order for possession, and that it must stand.
Issues like these are not restricted to individual lenders taking action. They commonly arise where one or other spouse is declared bankrupt. A bankrupt's whole estate is effectively transferred to the ownership of a trustee, whose role is to realise it for the benefit of creditors. In practice this can mean that spouses are subjected to court proceedings as the trustee seeks to sell property or other assets in order to ingather cash for distribution to creditors.
In this particular case, it was clear that if the lender had been unsuccessful, the spouse's trustee was ready to step in and seek to sell the property instead. Even if the property were jointly owned the trustee would have the right to insist on sale of the property and division of the sale proceeds. A sheriff has even ruled that a trustee has the right to enter a divorce action for that purpose.
An obvious solution might be to transfer the property into the solvent spouse's name, but this, too, is not without its problems. Any mortgage lender will require to consent to such a transfer, and may take the opportunity to renegotiate the mortgage terms and conditions.
In the case of bankruptcy there is also the risk that a trustee might seek to challenge the transfer. Any transfer of title within five years of an individual's bankruptcy can be challenged by the trustee, and the onus is usually on the spouse to show that the transfer was legitimate in terms of the bankruptcy legislation.
Most transfers of property designed with the primary intention to avoid the asset falling into the hands of the trustee in bankruptcy will end up being overturned. However, legitimate transfers of property between separated spouses are often required to achieve a fair division of the net matrimonial property.
In such cases it is necessary to show that the spouse receiving the property is entitled to it by virtue of their rights under the family law legislation, and that it is not unduly generous. As the onus will be on the spouse receiving the property, the basis for such a transfer, including the calculation of net matrimonial property, should be well documented and retained for at least five years.
In any case of relationship breakdown early and clear advice should be sought. Some investigation into the financial position of each spouse will usually identify potential solvency issues and most of the issues described above can be overcome or avoided if early action is taken.
It is crucial that advice is taken prior to decree of divorce being granted, as spouses' rights which have not been secured by a formal agreement between the spouses or by order of the court will end on divorce.