Insights

Can Ningbo Divorce Agreement Harms the Interests of Creditors be Revoked?

Ningbo Author：LuXu WANG

The husband and wife agreed to divorce, the house and savings were all assigned to one party, and the debt was left to themselves-the creditor could only stare? Not necessarily. The law provides creditors with the “right of rescission”: if a divorce agreement involves the gratuitous or undervalued transfer of property that impairs the realization of creditors’ rights, the creditor may petition the people’s court to rescind the relevant provisions, thereby restoring the property to the estate liable for debt repayment. First of all, the conclusion is that divorce is not a way to evade debts. If the property in the divorce agreement is divided and illegally excluded, as long as the two elements of "free or obviously unreasonable low-price disposition + affecting the realization of creditor's rights" (the low-price situation requires the relative's knowledge) are met and exercised within one year's exclusion period, the creditor's right of revocation can break down the seemingly "legal" divorce agreement.

1. The legal basis of the creditor's right of rescission: Articles 538 and 539 of the Civil Code

Article 538 of the the People's Republic of China Civil Code stipulates: "If the debtor disposes of the property rights and interests without compensation by giving up his creditor's rights, giving up the creditor's rights guarantee, transferring the property without compensation, or maliciously prolongs the performance period of his due creditor's rights, which affects the realization of the creditor's claim, the creditor may request the people's court to revoke the debtor's behavior. "Article 539 stipulates:" If the debtor transfers property at an obviously unreasonable low price, assigns another person's property at an obviously unreasonable high price, or provides security for another person's debt, which affects the realization of the creditor's claim, the debtor's counterpart knows or should know the situation, the creditor may request the people's court to revoke the debtor's behavior. These two provisions serve as the direct legal basis for challenging improper property dispositions in a divorce agreement. The difference between the two lies in the requirement for the subjective state of the relative: the gratuitous disposition (including waiver of claims, gift-type transfer) can be revoked without asking whether the relative is aware of it; the transfer of a clearly unreasonably low price requires the relative (the spouse or children of the transfer) to know or should know that the disposition harms the claim.

It should be noted that the debtor disposes the property to his spouse and children in a free or low-cost way. Because of the relatedness of his identity, "relative knowledge" is more easily established than ordinary transactions in proof-the husband and wife live together for a long time, and the spouse usually knows about the family debt situation; the court often presumes that the children should know about their parents' property without compensation. However, the creditor must still fulfill its initial burden of proof and may not rely solely on the existence of a familial relationship to establish liability.

2. Why can the property division in a divorce agreement be challenged?

The divorce agreement has the dual attributes of identity and property, and the property division clause in it is not free from the rules of creditor's rights. If one party, through a divorce agreement, transfers property to the spouse or children gratuitously or at an obviously unreasonable price, thereby reducing the party’s assets available for satisfying liabilities and rendering it unable to pay its due debts, such disposition may be subject to revocation. The relevant decisions of the Supreme People's Court and judicial practice in various places generally hold that: for creditors, if the agreement on the division of property in the divorce agreement constitutes a free or low-cost transfer of property and damages claims, creditors have the right to request the revocation of the corresponding provisions in accordance with Articles 538 and 539 of the Civil Code. The termination of a marital relationship does not automatically discharge the obligation to satisfy debts through the disposition of property—divorce agreements that result in one party “leaving with nothing” may provide relief to the debtor, but they pose an obstacle to creditors seeking recovery; accordingly, the law preserves the right of rescission as a remedy.

Two situations need to be distinguished: firstly, the distribution of common property in the divorce agreement is basically balanced (for example, it is divided by half according to capital contribution and contribution). Even if the debtor gets less share, it does not certainly constitute a revocable behavior that damages the creditor's rights. The court will examine the rationality of the division to prevent the creditor from interfering with the normal divorce property arrangement by the right of cancellation; secondly, the debtor's transfer of the share of property that should belong to him or her to his or her spouse almost free of charge, or the transfer of the only house, the main deposit to the other party and the debt, and the debtor's name is no longer available for execution, constitute a typical situation of damage to the claim.

Two key elements of 3. identification: damage to creditor's rights and relative's knowledge

When the creditor exercises the right of cancellation, it needs to prove two points: one is that the disposition of the debtor's property affects the realization of his creditor's rights -- the judgment time is usually when the behavior occurs, that is, the debtor's liability property is not enough to pay off the due debts after the disposition, and the common evidences include that the debtor has no property available for execution, the execution procedure ends, the debtor admits that it is unable to pay off, etc; second, the counterparty (the transferee's spouse, children) knew or should have known that the disposition was detrimental to the interests of the creditor-in the case of a manifestly unreasonable low price, or that the disposition itself was gratuitous and detrimental to the claim (gratuitous circumstances do not require proof of knowledge). In practice, the court will comprehensively judge the time of disposition and the time of debt formation, whether the debtor still has other property, the degree of deviation between the disposition price and the market price, and the relationship between the assignee and the debtor. “The intention to divorce” by itself does not constitute a valid defense; the mere assertion that “we have already divorced” is insufficient to preclude a creditor’s right of rescission.

Consequences, scope and duration of 4. revocation

If the court renders a judgment revoking the relevant provisions concerning the disposition of property, such property shall revert to the debtor’s estate and be used to satisfy the impaired creditors’ claims. The scope of revocation is limited to the amount of the creditor’s claim: if the value of the property subject to revocation exceeds the amount of the claim, only the portion corresponding to the claim shall be revoked, and the excess remains unaffected. With regard to the time limit, Article 541 of the Civil Code provides: “The right of revocation shall be exercised within one year from the date on which the creditor knew or ought to have known of the grounds for revocation.” If the right of revocation is not exercised within five years from the date on which the debtor’s act took place, such right shall lapse. “One year is the period of limitation for exercising a right of rescission; the suspension or interruption of the statute of limitations does not apply, and the right of rescission is lost upon expiration. Five years is the maximum period of protection, calculated from the date on which the dispositive act took place.” Upon learning that the debtor has “divorced to transfer assets,” the creditor should promptly initiate legal proceedings and should not adopt a wait-and-see approach.

5. Common misconceptions

  • Myth 1: Transferring all your assets to the other party in a divorce will allow you to avoid debt.Correct answer: If property is transferred gratuitously or at an unreasonably low price to the detriment of creditors’ rights, the creditor may, pursuant to Articles 538 and 539 of the Civil Code, request the revocation of such transfer, and the property shall be restored to the estate for liquidation.
  • Myth 2: There is no time limit for the right of revocation. positive solution: the right of revocation must be exercised within one year from the date of knowing the cause of revocation, and it will be eliminated if it is not exercised within five years from the date of occurrence of the act, and it will not be suspended or interrupted within one year.
  • Misconception 3: As long as the divorce agreement stipulates that the debts are to be borne by the other party, you are automatically exempt from liability.Correct answer: The agreement on debt allocation in a divorce agreement is only effective between the spouses and cannot be invoked against external creditors; when asserting claims against third parties, creditors may still pursue both parties in accordance with the statutory rules.
  • Misunderstanding 4: The transferee cannot be revoked without his knowledge.Correct answer: In cases of gratuitous disposition, it is irrelevant whether the other party is aware; only in cases of an obviously unreasonable low price is the other party’s knowledge required, and the familial relationship between spouses or between parents and children often makes it easier to establish that they “should have known.”
  • Misconception 5: A lawsuit to exercise the right of revocation must first be filed as a divorce action or an enforcement proceeding.Correct answer: A creditor’s action for rescission is an independent declaratory action and does not require the prior completion of enforcement in the preceding case; however, evidence must be provided to demonstrate the existence of the claim and the resulting harm.

6. Procedural Essentials and Evidence Checklist for a Lawsuit to Exercise the Right of Revocation

The cause of action of the creditor's right of rescission is "dispute over the creditor's right of rescission", which is under the jurisdiction of the people's court in the domicile or habitual residence of the defendant (debtor); the debtor is generally listed as the defendant, and the relative person (spouse, children) of the transferred property is listed as the defendant or the third person. The specific listing varies slightly from place to place, and the whole subject can avoid omission. The evidence is organized according to three groups: the first group of creditor's rights evidence-loan contract, debit note, effective judgment document and execution of final ruling, which proves that the creditor's rights really exist and have been damaged; The second group of disposition evidence-divorce agreement text, property transfer registration record, bank transfer flow, lock the content, time and object of the disposition behavior; the third set of subjective and damage evidence-the status of the property in the debtor's name at the time of disposition, the relationship between the assignee and the debtor, and the payment of the consideration by the assignee (no proof of knowledge is required for the gratuitous disposition, and the low-cost disposition must prove that the assignee knew or should have known). There are three practical skills: first, apply for property preservation at the same time, freeze the transferred property or account, and prevent the property from being transferred again during the lawsuit; The second is to clarify the sequential relationship between the "time when the divorce agreement is signed" and the "time when the debt is formed"-the malicious intent is more obvious after the debt is formed. Third, the scope of cancellation is limited to the amount of creditor's rights. If the value of the transferred property far exceeds the creditor's rights, it is sufficient to claim the withdrawal of a portion equivalent to the claim, without the need to pursue "full withdrawal". It is also necessary to remind the convergence rule: avoidance litigation and enforcement proceedings can be parallel-creditors can either file an avoidance action when enforcement is impossible, or they can apply for the restoration of enforcement or participate in the distribution of the returned property after the revocation judgment takes effect.

The path of liability beyond the right of revocation 7.: the reverse hint to the debtor and the transferee

The creditor’s right of rescission serves as the “first line of defense” in civil remedies; beyond this, there are also second and third lines of defense that are worth understanding. First, the risk of refusal at the enforcement level: after the judgment or ruling comes into effect, if the debtor refuses to execute the judgment or ruling by means of divorce agreement to transfer property, and the circumstances are serious, it may constitute the crime of refusing to execute the judgment or ruling-according to Article 313 of the Criminal Law and judicial interpretation, those who hide, transfer or intentionally damage property and make the judgment unenforceable may be convicted, and false divorce and transfer of property is a typical form. Second, the bottom line of the joint debt rules of husband and wife: if the transferred debt itself belongs to the joint debt of husband and wife (article 1064 of the civil code), the creditor can directly claim to both husband and wife, without relying on the right of revocation-first judge the nature of the debt, and then decide whether to use "joint debt recourse" or "revocation right" or both. Third, the transferee (spouse, children) tips: free transfer or knowing that the damage claims are still low-cost transfer, not only face the property is revoked and returned, may also be found to assist in evading the debt, involving the implementation of objections and additional procedures in the dispute in the passive. For debtors, the most rational choice is to face their debts honestly—negotiating with creditors for installment plans, reaching a settlement, or providing collateral—rather than resorting to the temporary and costly measure of “divorce-based asset transfer.” Once such a transfer is set aside, the assets revert to the estate for liquidation, while litigation costs, accrued interest, and damage to one’s credit standing remain irreparable.

8. Frequently Asked Questions

What about the creditor when the divorce agreement gives the property to the other party?

If the disposition is gratuitous or obviously unreasonably low and affects the realization of the creditor's rights, the creditor can request the court to revoke the relevant property provisions according to Article 538 and Article 539 of the Civil Code, so that the property can be returned to the debtor's liability property for repayment; the low price situation also needs to prove that the transferee knows.

Under what circumstances can it be revoked?

Two points need to be proved: the disposition of property affects the realization of creditor's rights; the relative person knows (unreasonable low price situation) or the disposition itself is free and damages the creditor's rights. “Divorce” alone does not constitute grounds for annulment; however, a standard divorce settlement involving a substantially equitable division of assets does not give rise to such grounds.

How is the property handled after revocation?

The canceled clause is invalid from the beginning, and the property is returned to the debtor's liability property, which is used to pay off the damaged creditor's rights; the scope of cancellation is limited to the amount of the creditor's rights, and the excess part is not affected.

Is there a time limit for creditors to exercise their right of revocation?

Yes. If it is exercised within one year from the date of knowing the cause of the revocation (except for the period of revocation, without suspension or interruption), and if it is not exercised within five years from the date of the debtor's act, the right of revocation shall be extinguished.

Can I exercise the right of revocation in advance before the creditor's rights are due?

In principle, the creditor's right must be due and the debtor is unable to pay off before it can "affect the realization of the creditor's right"; however, if the creditor's right with conditions and time limit is in real danger of being damaged, the judges in different places have different attitudes towards the early exercise. It is suggested to fix the evidence first, exercise the creditor's right in time when it is due, or prevent the property from re-circulation through preservation measures.

How to execute the revoked property if the lawsuit of revocation right is won?

After the revocation judgment comes into effect, if the property returns to the debtor's liability property, the creditor can apply to resume the execution of the original creditor's rights or apply for the execution of the returned property; if the property is still registered in the name of the transferee and refuses to return, the creditor can apply for compulsory execution of transfer or auction, and if necessary, add the transferee as the person subject to execution and file a lawsuit for execution objection.

9. Practical insights from a lawyer's experience

If the house and savings are assigned to one party while the debts are left with the other, does that mean creditors can only stand by and watch? Not necessarily. The property division clause of the divorce agreement is not unfettered, and if it essentially constitutes a gratuitous disposition, or if the property is transferred at an obviously unreasonably low price, affecting the realization of the claim, the creditor may request the revocation of the relevant clause and return the property to the liability property for liquidation. The thresholds are slightly different: gratuitous dispositions generally do not depend on the knowledge of the assignee; in the case of a clearly low price, the assignee's spouse or child is required to know or should have known that the claim would be compromised. However, the right of rescission has a clearly defined period for its exercise; once that period expires, the right is extinguished. Therefore, this remedy cannot be invoked at any time.

For creditors to win such lawsuits, the key is to thoroughly prove three essential points. The creditor's rights are legal and valid and are generally formed before the property is disposed of, and are proved by contracts, IOUs, transfer records or effective judgments. The disposition is free of charge or obviously low price, which is explained by the division content of the divorce agreement, the flow direction of real estate and deposits, and the evidence that the transaction price obviously deviates from the market price. This disposition left the debtor with no other property available for execution and affected the settlement. Since the transferee is mostly a spouse, children, living with each other for a long time, "knowledge" is usually easier to prove than ordinary stranger transactions, but the creditor still has to complete the preliminary proof, can not only rely on kinship one-step presumption. The court will also examine whether the division itself is reasonable; a distribution that is broadly balanced in proportion to each party’s contributions and capital contributions does not, even if the debtor receives a slightly smaller share, automatically constitute a transfer that may be set aside.

for both sides of the agreement, the biggest mistake is to regard "internal agreement" as "external barrier". If the agreement that "the debt belongs to each other" is only valid between you and belongs to the common debt, the creditor may still demand repayment from either party, and the recovered party shall recover the other party in accordance with the agreement. So the real line of defense before the divorce: to find out the external liabilities, let the other party write out all the debts and sign for confirmation, check the credit and account flow, the known liabilities and concealment responsibilities written into the agreement annex. If you knowingly transfer the property to the other party almost free of charge and leave no enforceable property in your own name, knowing that there is a large amount of debt, then the agreement not only fails to stop the creditor, but may in turn become adverse evidence in the recovery of the other party. Instead of focusing on "how to hide", it is better to spend it on "how to settle debts and write boundaries to death".

Divorce is not a way to escape debt. For creditors, in the face of "false divorce and real transfer", there are three correct steps: first, fix the divorce agreement between the creditor's rights certificate and the debtor and the clues of property disposition, and confirm that the disposition is free or obviously unreasonable at a low price; Then check whether there is any property available for execution under the debtor's name to prove that the realization of the creditor's rights has been damaged; Finally, it is necessary to file a lawsuit for cancellation within one year from the date when the cause, if necessary, apply for property preservation simultaneously to prevent the property from being disposed of again during the litigation. On the part of the debtor, the "transfer of property to the former spouse" cannot resist the right of revocation, rather than being revoked or held accountable afterwards, it is better to pay off honestly or negotiate a debt settlement with creditors.

also needs to remind the creditors of a co-ordination strategy: the litigation of the right of rescission and the litigation and execution procedure of the principal creditor's right against the debtor can be promoted in parallel-the principal creditor's right enters the execution after winning the lawsuit, and if the debtor is found to have no property and then uses the right of rescission to recover the transferred property, the convergence of the two can cover the risk of "judgment idling"; the time should be reversed: the main creditor's rights litigation, the right of revocation of the one-year period, the implementation of the procedures have their own time limit, it is recommended to fix the evidence, calculate the time limit before the formation of troops.