Bankruptcy and its impact on separating couples

Since 2005, the Family Courts have had the power to alter the property interests of bankrupt and non-bankrupt spouses. Some interesting points of law that have become clear in recent years include the fact that:

1. The Family Courts can alter property interests even when property has already been handed over to the trustee in bankruptcy.
2. The Family Courts may even make orders for spousal maintenance against the trustee in bankruptcy for the benefit of the non-bankrupt spouse.
3. In some circumstances, it is now possible for the non-bankrupt spouse to make a claim when the parties have not legally separated.

Streeterlaw’s Simone Green, an Accredited Specialist in Family Law, said the Family Courts have become somewhat of a ‘super jurisdiction’ in cases such as these.

“While the Family Court now has powers to change property interests in cases of bankruptcy, people who try to use the Family Court in an effort to preserve property from claims by creditors will be discredited,” she said. “We advise clients to be very careful in preparing their case as orders can be subsequently set aside if it is found that those orders were made in an effort to preserve property from creditors.”

Circumstances where the Family Courts get involved in bankruptcy issues

Generally, the Family Courts become involved in bankruptcy issues in the following circumstances:

1. Where one spouse becomes bankrupt during the course of Family Court proceedings;
2. Where one spouse has already become a bankrupt at the time the application is made to the Family Courts;
3. Where Family Court orders were made by the consent of the parties prior to the bankruptcy and the trustee attempts to set them aside (change the orders).

The property subject to the Family Court’s alteration powers includes:

1. The bankrupt’s property now vested in the trustee;
2. The bankrupt’s property that falls under the exclusions to the Bankruptcy Act (such as superannuation, certain household items, tools of trade up to a certain value and a motor vehicle being the principal means of transport up to an indexed value)
3. Assets of the non-bankrupt spouse.

When considering the adjustment of any property interests, the Family Courts are required to assess the following issues:

1. The financial and non-financial contributions made by each spouse to the acquisition, conservation or improvement of any property of the relationship;
2. The contributions as homemaker/parent;
3. The future needs of the parties.

The Court will make an order that it considers is just and equitable in all of the circumstances; no priority is given to either the trustee in bankruptcy nor the non-bankrupt spouse.

Ms Green said the non-bankrupt spouse now has greater protection.

“Provided that the Court finds that there have been no fraudulent transactions in respect to cheating creditors, the non-bankrupt spouse now has great protection under the Act,” she explained.

In circumstances where the parties have previously entered into a consent order adjusting property through the Family Court or a Financial Agreement in accordance with the Family Law Act prior to one spouse becoming bankrupt, the trustee will try to have the orders set aside (pursuant to s79A of the Act). The Court may set aside a consent order or Financial Agreement in circumstances where it is satisfied that there has been a miscarriage of justice by reason of fraud, duress, suppression of evidence (including failure to disclose relevant information) among other things. In other words, the Act cannot be used as a mechanism to defeat the interests of creditors.

When orders or a Financial Agreement are set aside by the Family Courts, the non-bankrupt spouse may make an application for a property adjustment, which will be considered in the usual way.

If you would like further advice or information, please contact the Family Law experts at Streeterlaw on 1300 293 593 or email advice@streeterlaw.com.au.