A settlement agreement reached during a divorce is generally considered the final resolution of the dispute between the former spouses. However, can one of the spouses later avoid the financial obligations assumed therein by filing for personal bankruptcy? This very dispute was heard in Lithuanian courts. In the case, in which the creditor’s interests were represented by AVOCAD associate partner Egidijus Kieras, the court had to determine whether personal bankruptcy could serve as a basis for discharging a debt that arose not from a business or a loan, but from a settlement agreement reached during a divorce.
What makes this case unique is that the applicant’s largest debt did not arise from a failed business venture, a consumer loan, or a guarantee. When they divorced, the former spouses entered into a settlement agreement under which the husband undertook to pay his former wife 50,000 euros in compensation within 60 days. This agreement did not come about by chance. Prior to its conclusion, claims had been filed in the divorce proceedings seeking a reduction in the spouses’ joint property. The complaint alleged that during the marriage, part of the joint property had been concealed, while another part had been transferred in violation of one of the spouses’ interests.
In an effort to avoid a lengthy legal process, the parties reached a compromise—instead of significantly higher claims, they agreed on 50,000 euros in compensation and a penalty for failure to pay it.
However, the compensation was never paid.
A few years later—a petition to file for personal bankruptcy
A few years later, the debtor filed a petition with the court requesting that a personal bankruptcy case be initiated.
Essentially, this would mean that, once the bankruptcy proceedings were concluded, he would seek to be released from the obligation arising under the settlement agreement entered into at the time of the divorce.
The creditor’s position in the case was clear—the bankruptcy of a natural person cannot be used as a means to avoid liability for obligations assumed in order to finally resolve a dispute over the spouses’ joint property.
The courts took into account not only the debts but also the debtor's conduct
Both courts that heard the cases emphasized that insolvency alone is not sufficient grounds for initiating bankruptcy proceedings against a natural person.
The courts assessed the applicant’s conduct as a whole. It was established that the applicant had undertaken to pay 50,000 euros in compensation without realistically assessing his financial ability to do so. More importantly, he subsequently failed to take active steps to restore his solvency.
The case also established that the petitioner had no intention of looking for a better-paying job, refused to reduce his regular expenses, and fulfilled the majority of his obligation only through compulsory collection.
After evaluating these circumstances, the courts concluded that such conduct does not meet the standard of a bona fide debtor.
“Personal bankruptcy is not a mechanism for shirking inconvenient obligations. This legal institution is intended for honest debtors who genuinely seek to settle their debts with creditors and make every effort to restore their solvency. Courts are increasingly looking not only at formal insolvency but also at how the individual behaved when assuming and fulfilling their obligations,” comments Egidijus Kieras, an attorney at AVOCAD.
An Important Note on Divorce Cases
The significance of this case extends beyond the mere application of the institution of personal bankruptcy. In practice, when entering into settlement agreements regarding divorce, it is not uncommon for one spouse to agree to pay monetary compensation for the other spouse’s share of the joint property. The other party reasonably expects that such an agreement will be honored.
If such obligations could be easily discharged through personal bankruptcy proceedings, this would undermine confidence in settlement agreements and encourage abuse of this legal mechanism.
“In the case at hand, both the trial court and the appellate court clearly noted that personal bankruptcy is not a means of renouncing obligations assumed during a divorce simply because they have become inconvenient.”
This case has once again demonstrated that the courts consider not only the amount of the debt or formal insolvency, but also the debtor’s conduct both in assuming obligations and in fulfilling them. “Therefore, in cases where it is determined that the debtor acted in bad faith, personal bankruptcy cannot be used as a means to negate obligations assumed during a divorce,” notes Egidijus Kieras.