What is Bankruptcy?

Bankruptcy is a legal financial status under the Bankruptcy Act 1966. Once a person is
declared bankrupt, a number of things happen including:

  • A Trustee in Bankruptcy is appointed to manage the bankrupt’s affairs; a Trustee “steps into
    the shoes” of the bankrupted person and makes all major financial decisions
    thereafter;
  • The bankrupt’s property (there are exceptions including certain household goods, some
    personal property, a motor vehicle up to a certain value, property held in trust for somebody else,
    superannuation) vests in the Trustee in Bankruptcy for sale and division among the
    creditors;
  • Creditors (secured and unsecured) can no longer enforce or chase the
    debt;
  • Assets that the bankrupt acquires during the period of bankruptcy (eg. an inheritance) may
    also be sold by the Trustee in Bankruptcy;
  • At the end of the bankruptcy period, the bankrupt will be discharged and released from most
    of the remaining debts and the bankrupt can start again with a clean sheet.

Becoming Bankrupt

A person may:

(a) Become bankrupt by a debtor’s petition under Section 55 of the Bankruptcy Act;
or

(b) Be made involuntarily bankrupt by a creditor’s petition, by creditors who are owed money and
who bring a Court Application.

Bankruptcy and Family Law

Jurisdiction:

  • The Family Court and the Federal Circuit Court divide up property as between married parties
    or de factos, in circumstances of relationship breakdown.
  • If one of the parties to the relationship is a bankrupt, the Family Court and the Federal
    Circuit Court also have jurisdiction to deal with any matter connected with the bankruptcy of a
    party to that relationship, in proceedings under the Family Law Act 1975, involving
    Property Settlement, Spousal and De Facto Maintenance, or enforcement of Orders made
    by those Courts.

Creditors Versus Non-Bankrupt Spouse:

  • In 2005, amendments were made to the Bankruptcy Act and the Family Law
    Act
    , designed to clear up and sort out the competing interests of the Bankruptcy Trustees
    (representing creditors) and the non-bankrupt spouse (often the spouse who knew little about his/her
    spouse’s financial dealings). As a result, Family Law Courts (Section 79(1)(b) of the Family Law
    Act 1975
    ) can now alter the interest of the Trustee in Bankruptcy in “vested bankruptcy
    property”. The Court can order the Trustee to transfer property for the benefit of the non-bankrupt
    spouse or a child of the marriage.
  • Since 2009, the same law has applied in relation to de facto partners
    too.
  • As between the Trustee in Bankruptcy and the non-bankrupt spouse, the Court can only make a
    property alteration in one direction, ie. in favour of the non-bankrupt spouse. That means the
    Trustee cannot ask the Court to seek to take money from the non-bankrupt spouse in an
    attempt to swell the pool available for creditors.
  • When a Court is trying to sort out the competing interests between the Trustee in Bankruptcy
    and the non-bankrupt spouse, the Court has to carefully identify and weigh up the bankrupt spouse’s
    and non-bankrupt spouse’s existing legal and equitable interests in the matrimonial property. Then
    the Court requires to work out what the non-bankrupt spouse can keep or receive and what must stay
    with the Trustee in Bankruptcy as vested bankruptcy property for creditors.
  • When the Family Court is working out what Orders are appropriate:
    • The Court cannot allow any creditors to be joined into the
      proceedings;
    • The Court must join the Trustee in Bankruptcy however, into property settlement proceedings
      (on behalf of the creditors) if the Court thinks the interests of creditors will be affected by the
      Court making property settlement Orders as between the spouses;
    • The Court must take into account the effect of any proposed Orders on the creditor’s ability
      to recover their respective debts;
    • The Court can, for example, set aside a transfer of a property by the bankrupt spouse to the
      non-bankrupt spouse if it was made within 5 years of the start of the bankruptcy and seen to have
      been an attempt to defeat creditors.

The legal and equitable complexities arising where family law and bankruptcy clash are
considerable and fraught with difficulty. Whether you are the bankrupt spouse, the non-bankrupt
spouse or a disgruntled creditor, your interests must be properly protected.

Please feel free to contact a member of our experienced Family Law team, for an obligation-free chat about the vexed
issues arising where bankruptcy meets family law.