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Bankruptcy and family law: what to know

By May 7, 2021February 23rd, 2024No Comments

Thanks to the pandemic, more people are seeking relief from their financial troubles by entering into bankruptcy. While this may well give them a much-needed fresh start, if you are also going through a divorce with someone facing bankruptcy, where does it leave you? Here’s a quick rundown about bankruptcy and family law.

If you are going through a property settlement dispute with a former partner, it can be very traumatic to find out that your ex is facing bankruptcy or has been declared bankrupt.  Understandably you would have serious concerns as to how this would affect your property settlement or application for spousal maintenance. And if your ex files for bankruptcy they may well eliminate their responsibility towards a matrimonial debt, but that debt isn’t magically erased. The creditor is still able to come after any remaining debtor (for example, you if it is a joint debt).

Following is a very general explanation of what occurs when a spouse in a property settlement proceeding becomes bankrupt, however it is a very complex area of the law and it’s necessary to obtain advice tailored to your specific situation.

It’s important to understand that just because a spouse has been declared bankrupt, it’s not the case that the non-bankrupt spouse no longer has any remedy in the family law jurisdiction.  The reality is that the non-bankrupt spouse can still pursue an adjustment to property interests under the Family Law Act 1975.

Since 2005, the Family Court has had the jurisdiction to deal with matters relating to a bankrupt spouse’s property.  The Bankruptcy and Family Law Legislation Amendment Act 2005 (BFLAA) changed the Family Court’s role, which in the past had been very limited–before the BFLAA was enacted, family law and bankruptcy had been governed by two separate pieces of legislation, namely the Bankruptcy Act 1966 and the Family Law Act 1975.

If a spouse has been declared bankrupt, a trustee appointed, and the bankrupt party’s property vested in (held by) the trustee under the Bankruptcy Act 1966, the Family Court’s role can extend to having jurisdiction in any matter relating to the bankruptcy, for example connected to property settlements (under section 79 or 90SM of the Family Law Act), the setting aside of property orders (under section 79A or 90SN of the Family Law Act), spouse or de facto spouse maintenance (sections 72 or 90SE respectively of the Family Law Act), or the enforcement of such orders.

So what happens if a party to a pre-nup or other financial agreement goes bankrupt, and you are in court about setting aside the agreement? Changes to the Bankruptcy Act several years ago mean that the Family Court of Australia also has bankruptcy jurisdiction in such cases, and the bankrupt party’s Trustee can participate in that court case even though they were not a party to the original agreement. (In a nutshell, the Trustee takes over and steps into the shoes of the bankrupt person, and runs a case instead of the person who has gone bankrupt.)

Once a bankrupt spouse’s financial affairs are managed by a trustee, your ability to negotiate directly with your bankrupt spouse does become very limited.  In some cases a trustee may be willing to negotiate to reach a settlement that will be advantageous to the bankrupt spouse, but usually it becomes necessary to launch legal proceedings in the Family Court or the Federal Circuit Court.

An individual who is declared bankrupt is no longer able to hold property or assets other than, typically, household goods, superannuation, life insurance policies, certain tools of trade and a motor vehicle to a certain value until the bankruptcy is discharged. Instead, their property is vested in the trustee. However, the court can make the trustee a party to a property settlement dispute.  So while the bankrupt individual can no longer transfer any property or pursue any entitlement to a property settlement, their trustee is able to do so.  The BFLAA provides the non-bankrupt spouse with protection of their interest in matrimonial assets, and also provides the opportunity to obtain a share of the bankrupt spouse’s vested assets.

The court has powers under the BFLAA to make orders, for example, which may protect the non-bankrupt spouse’s interest in the matrimonial home, even if the registered title to the property was in the bankrupt’s name.  The court can also order the property to be sold and proceeds distributed to a spouse.  In making orders, the court is required to balance the competing rights of creditors and the non-bankrupt spouse–neither one has priority over the other.

Having a former partner facing bankruptcy does therefore not mean all is lost in terms of proceedings in the family courts.  Time is of the essence, however, as it is crucial to act quickly before a trustee starts disposing of matrimonial assets.

To discuss any issues surrounding bankruptcy and a family law matter, please contact Canberra family lawyer Cristina Huesch or one or our other experienced solicitors here at Alliance Family Law to discuss the situation.

Please note our blogs are not legal advice.  For information on how to obtain the correct legal advice, please contact Alliance.


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