This is exactly the kind of dispute that was examined in Lithuanian courts. In the case where the creditor’s interests were represented by AVOCAD associate partner, lawyer Egidijus Kieras, it was decided whether an individual’s bankruptcy can be a basis to get rid of a debt that arose not from business or a loan, but from a settlement agreement made during a divorce.
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The uniqueness of this case is that the largest debt of the claimant did not arise from a failed business, consumer credit, or guarantee. When terminating the marriage, the former spouses made a settlement agreement in which the husband undertook to pay the former wife 50,000 euros in compensation within 60 days. This agreement did not arise by chance. Before its conclusion, claims were made in the divorce case regarding the reduction of joint marital property. The lawsuit stated that part of the joint property was concealed during the marriage, and another part was transferred in violation of one spouse’s interests.
To avoid a long judicial process, the parties chose a compromise – instead of much larger claims, they agreed on 50,000 euros compensation and a penalty for its non-payment.
However, the compensation was never paid.
After several years – a request to initiate an individual bankruptcy case
After several years, the debtor applied to the court requesting to initiate an individual bankruptcy case.
Essentially, this would have meant that after the bankruptcy process, he would seek to be released from the obligation arising from the settlement agreement made during the divorce.
The creditor’s position in the case was clear – individual bankruptcy cannot be a means to avoid responsibility for obligations assumed to finally resolve the dispute over joint marital property.
The courts evaluated not only the debts but also the debtor’s behavior
Both court instances that examined the cases emphasized that mere insolvency is not sufficient to initiate an individual bankruptcy case.
The courts evaluated the entire behavior of the claimant. It was established that the claimant undertook the obligation to pay 50,000 euros compensation without realistically assessing his financial ability to fulfill it. More importantly, he later did not take active steps to restore his solvency.
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The case also established that the claimant did not intend to look for better-paid work, refused to reduce his regular expenses, and fulfilled the majority of the obligation only through forced recovery.
Considering these circumstances, the courts concluded that such behavior does not meet the standard of an honest debtor.
“Individual bankruptcy is not a mechanism that allows one to refuse inconvenient obligations. This institution is intended for an honest debtor who genuinely seeks to settle with creditors and makes maximum efforts to restore his solvency. Courts increasingly evaluate not only formal insolvency but also how the person behaved when assuming and fulfilling his obligations,” comments AVOCAD lawyer Egidijus Kieras.
An important message in divorce cases
The significance of this case is broader than just the application of the individual bankruptcy institution. In practice, when making settlement agreements for divorce, often one spouse undertakes to pay monetary compensation for the other’s share of joint property. The other party reasonably expects that such an agreement will be fulfilled.
If such obligations could be easily canceled by using the individual bankruptcy procedure, it would reduce trust in settlement agreements and encourage abuse of this institution.
“In the examined case, both the first and appellate courts clearly reminded that individual bankruptcy is not a means to refuse obligations assumed during divorce just because they became inconvenient.
This case once again showed that courts evaluate not only the amount of debt or formal insolvency but also the debtor’s behavior both when assuming obligations and when fulfilling them. Therefore, in cases where it is established that the debtor acted dishonestly, individual bankruptcy cannot be a means to negate obligations assumed during divorce,” notes Egidijus Kieras.
