Bankruptcy and Family Law – not as clear cut as you would imagine!

Did you know that upon bankruptcy, the bankrupt person’s property becomes ‘vested’ in the trustee in bankruptcy which strips them of their legal claim to property including the right to commence or defend legal proceedings?

So, what does that mean for separating couples where one party is or is about to become bankrupt?

Streeterlaw’s Accredited Specialist in Family Law, Simone Green explains the intersection of Bankruptcy and Family Law and what can be done to protect both parties’ interests.

Property according to the Bankruptcy Act 1966 (Cth) (‘the BA’) means “real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.”

There are some exceptions however within the BA to what is ‘divisible property’ and what is ‘exempt property’. Exempt property includes most household goods, tools of trade, superannuation interests and enough money and other such assets to allow for day to day living of the bankrupt.

The Family Court and the Federal Circuit Court (‘the Family Courts’) have jurisdiction in any matter connected to or arising out of the bankruptcy of a spouse (either married or de facto). This includes property adjustment, spouse maintenance, declaration of interest in property, enforcement of orders; and applications to set aside orders.

While the bankrupt person loses the ability to bring proceedings in their own right for vested property, this does not include superannuation which can often form a sizeable portion of the marital property pool for division. Interestingly, in circumstances where superannuation is the only property, the bankrupt spouse may be a named party to proceedings in the Family Courts in their own right.

If proceedings have already commenced in the Family Courts, or any court, prior to bankruptcy, in respect to property which later becomes vested property, those proceedings are automatically stayed for 28 days during which time the Trustee must make an election to continue the litigation, failing which the proceedings are deemed to be abandoned.

The ex-spouse of a bankrupt person may commence or continue proceedings, for property against the Trustee in bankruptcy in the Family Courts. The Court does not automatically favour the non-bankrupt spouse over the Trustee but must determine the competing rights of each. The judge considers the case in the usual way, simply apportioning any entitlement that may have gone to the bankrupt person as part of the marital asset split, to the Trustee instead, except for superannuation which may still be split between the parties.

The non-bankrupt spouse may also apply to the Family Courts for an injunction restraining the Trustee in bankruptcy from declaring or distributing property of the relationship such as the family home which is not a protected asset under the BA. The Court has the power to order the Trustee to transfer vested property to the non-bankrupt spouse to satisfy their entitlements pursuant to the Family Law Act.

The intersection of bankruptcy and Family Law is complex and advice in this regard should not be left to the general legal practitioners; it is essential to obtain expert legal advice early to protect your interests.

Streeterlaw has Accredited Specialists in both Family and Commercial Law who can confidently guide you through the process and protect your rights. We welcome your enquiry by telephone 02 8197 0105 or via the below form.