Insolvency | How it affects each party depends on the marital regime – in community of property or out of community of property
In recent articles we have talked about the various marital regimes and why you might opt for one or other. There are some advantages and disadvantages to each regime; and we have covered how you can change your status once you are already married. Often circumstances arise that were beyond your ability to foresee when you were young and in love; and it’s at that point that the choice of marital regime can become critical.
Divorce is not the only scenario in which you can be affected by whether you married in community of property or out of community of property. Another major event to consider (however unpleasant) is insolvency.
What is insolvency?
Firstly, let’s clear up a myth. Insolvency is not the same as bankruptcy, although the terms are often used to mean the same thing. One is a financial state; the other is a legal procedure. Someone is insolvent when they are unable to pay their debts, either because their liabilities exceed their assets, or because they have insufficient cash flow. The latter is a particular trap for small businesses and self-employed traders. Business might appear to be booming but if invoices remain unpaid there may be insufficient funds to pay debts; and insolvency is the result.
Bankruptcy, on the other hand, occurs when one of the following takes place:
- A person or legal entity, i.e. a close corporation or company, makes an application to the relevant court to have themselves declared bankrupt
- A creditor of a person or legal entity makes an application to the relevant court to have the company or person declared bankrupt
- A legal entity files a special resolution with the Registrar of Companies to be declared bankrupt
Insolvency may lead to bankruptcy but does not necessarily do so; it may be possible to rectify the situation without legal protection from creditors. Insolvency does not automatically cause bankruptcy, but all bankrupt debtors are considered insolvent.
Insolvency in the context of marriage
Once upon a time, as they say in all fairy tales, most marriages were in community of property, that is, all assets were held jointly by both spouses. When women were less likely to earn their own income and more likely to look after home and children, this afforded them a degree of protection in the event of the breakdown of the marriage: they were assured an equal division of assets. Of course it also meant liabilities were shared, and if the main income earner (traditionally the man) was declared insolvent and subject to sequestration (effectively personal bankruptcy, where one’s assets are sold to pay creditors), the joint estate was sequestered and the woman’s lot was thrown in with that of her husband.
Insolvency – marriage out of community of property
It is increasingly common for couples approaching marriage to draw up an antenuptial contract and elect to be married out of community of property. In this scenario, each party’s estate is discrete, and the solvent partner’s estate does not form part of the insolvent partner’s estate in the event of insolvency of either spouse.
However, should the insolvent party be sequestrated, the solvent party is considered liable until documentation is produced (such as an antenuptial contract) that proves the separate legal ownership of assets. The court must be satisfied that the solvent partner’s assets were legitimately acquired in compliance with the Insolvency Act.
Protecting a business
Both partners are protected by the out of community of property marital regime. A couple may be able to maintain a reasonable standard of living and continue to enjoy credit facilities if one spouse is insolvent but the other retains their solvent status. More importantly, if one partner runs a company (or indeed if both have business interests), the solvent spouse is afforded protection. They can continue trading separately from the insolvent spouse. However, the solvent spouse will have to show that any interest the insolvent estate has in the assets is protected.
Consider an antenuptial or postnuptial contract
If you are getting married or are already married and have a business, it is highly advisable to ensure your marriage is out of community of property. This will protect your business should your partner become insolvent, and will also protect your partner and their business interests should your company fall into insolvency. If you married in community of property and wish to change your marital regime, you can do so by way of a postnuptial contract.
We can help
Simon Dippenaar and Associates are experts in family law. We have handled hundreds of antenuptial and postnuptial contracts and can help you choose the marital regime that is right for your circumstances. In this article we have given a brief overview of insolvency within marriage; but there can be many factors to consider. If you’d like more information or want to discuss your situation, contact us on 086 099 5146 or 076 116 0623 or email firstname.lastname@example.org.
- For more about our approach to divorce click here.
- For more about how to choose a divorce lawyer click here.
- For more about foreign divorces click here.
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- The financial impact of marriage and divorce