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How Bankruptcy can affect the conduct and outcome of family law proceedings

27/07/2020

The Bankruptcy Act (Cth) 1966 sets out the law of bankruptcy in Australia.  A person can become a bankrupt if they are unable to pay their debts as and when they fall due.  A person may become a bankrupt because a creditor has served a Bankruptcy Notice and then filed and pursued a Petition for Bankruptcy in the Federal Court.  A person can also present a Debtors Petition to the Insolvency in Trustee Service of Australia and become a bankrupt on their own application. 

If one party to a marriage or a de facto relationship is a bankrupt or becomes a bankrupt there are consequences in Family Law Bankruptcy which will affect the way in which a Family Law matter proceeds as well as affecting the outcome.  The costs of conduct of the proceedings and the length of the proceedings will also increase. 

What Happens When You Go Bankrupt?

When a person becomes a bankrupt all of their property (except exempt property) vests in the Trustee in Bankruptcy (Section 58 Bankruptcy Act 1966).  This means that they no longer own their property.  The Trustee in Bankruptcy can replace the Bankrupt on title of the Bankrupt’s property.  In cases where for example, a husband and wife own property jointly, the Trustee will become the co-owner of the property with the now bankrupt spouse. 

The automatic vesting of property in the Trustee does not apply to exempt property which includes:

  • Property that the bankrupt is required by order of the Family Court.
  • Property held by the bankrupt on trustee.
  • Superannuation.
  • Superannuation splits under the Family Law Act.
  • Most household goods.
  • A motor vehicle of modest value.
  • Tools of trade.
  • The property transferred under a maintenance order.
  • Compensation for personal injury; or assets bought substantially with that, compensation money. 

The Bankruptcy Trustee in the Family Court

The right to commence proceedings for property settlement against the bankrupt spouse does not vest in the Trustee in Bankruptcy.  Other provisions of the Family Law Act allow the Trustee to enter the Family Court proceedings.  The Trustee cannot commence the proceedings and the Trustee is not automatically a party to property settlement proceedings.  An action commenced by a person who later becomes bankrupt is stayed until the Trustee elects to prosecute or discontinue the action.

Section 79(11) of the Family Law Act provides that:

          “If:

(a)      an application is made for an order under this section in proceedings between the parties to a marriage with respect to the property of the parties to the marriage or either of them; and

(b)      either of the following subparagraphs apply to a party to the marriage:

(i)       when the application was made, the party was a bankrupt;

(ii)      after the application was made but before it is finally determined, the party became a bankrupt; and

(c)      the bankruptcy trustee applies to the court to be joined as a party to the proceedings; and

(d)      the court is satisfied that the interests of the bankrupt's creditors may be affected by the making of an order under this section in the proceedings;

the court must join the bankruptcy trustee as a party to the proceedings.”

If the Section 79(11) requirements are met, the Family Court/Federal Circuit Court must join the Trustee as a party to the family law proceedings.  The Trustee is not obliged to join the proceedings and can seek to be released from the proceedings if they object to continuing.  The Trustee may not see any cost benefit in pursuing the Application.

Effect of a Bankruptcy on Jointly Owned Property

In the event that one of the registered proprietors of real estate becomes bankrupt the intent of the Bankrupt in that property, vests in the Trustee and the Trustee goes on to title.  The co-owners become the Trustee in Bankruptcy and the new Bankrupt spouse.  The dynamic of the ownership has been changed.  The Trustee will attempt to move as much of the assets as are available into the Estate of the Bankrupt.  The interests of the Creditors will be most important to the Trustee – not the interests of the spouse. 

If you are faced with a spouse or partner becoming bankrupt or you are facing bankruptcy and are proposing to enter into financial/property settlement with your spouse or partner and have and concerns as to how this will affect your property/financial settlement outcome, please contact Richard Watson Senior Family Lawyer or Shereen Da Gloria his Personal Assistant to discuss your concerns and seek timely advice.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.

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