Bankruptcy & Family Law in Australia

Family law matters can be complex at the best of times, but if one spouse becomes bankrupt matters can become far more complicated.

Under the Bankruptcy Act 1966 (Cth) in Australia, a person may apply for voluntary bankruptcy if they:

• Are unable to pay their debts as and when they fall due (insolvent); and
• Have a connection to Australia, which may be through living here, being physically present or running a business that is linked to the country.

There is no minimum or maximum amount of debt or income required to be eligible to apply for bankruptcy.

A creditor (someone who is owed money by the bankrupt) can apply to make someone bankrupt on a creditor’s petition. The debt must be at least $10,000.

KEY CONSIDERATIONS

The Family Law Act 1975 (Cth) (FLA) and Bankruptcy Act intersect in complex ways, affecting family law property settlement proceedings. Bankruptcy can have significant consequences for individuals and their finances, particularly in marriage or de facto relationships.

Understanding the impact of bankruptcy on family law proceedings is crucial for navigating these complex issues. The Australian Financial Security Authority (AFSA) plays a key role in regulating bankruptcy and personal insolvency agreements.

WHAT HAPPENS IF A PROPERTY SETTLEMENT TAKES PLACE AFTER A SPOUSE HAS BEEN MADE BANKRUPT?

Bankruptcy complicates the process of a family law settlement because the trustee in bankruptcy is involved in deciding what assets are available for the property settlement and how they should be divided. Additionally, if any property that was once jointly held between the parties becomes part of the bankrupt estate, the trustee will have a significant say in how those assets are dealt with.

If a property settlement is upcoming or underway and one spouse becomes bankrupt during the process, the family law matter will shift in the following ways:

1. The non-bankrupt spouse: The person who is not bankrupt can continue with their claim for a property settlement, but the property proceedings will now involve the trustee in bankruptcy (representing the interests of the creditors) instead of the bankrupt directly.
2. The bankrupt spouse: For the individual who becomes bankrupt during property settlement proceedings, control over their assets is largely removed. Once a sequestration order is made (i.e. the person is made bankrupt), most of their property automatically vests in the trustee. This means the bankrupt spouse is not involved in the family law process regarding that property, as the trustee has control of that property. The bankrupt can usually only participate with respect to property which is exempt from the bankruptcy, like most superannuation, a modest vehicle, modest furniture and modest tools of trade.
3. The trustee’s role: When a person becomes bankrupt, their assets vest in a trustee, who manages the estate for creditors. In a family law property settlement, the trustee has the right to be involved in the court proceedings. The court then weighs the claims of the non-bankrupt spouse against the trustee’s obligation to recover assets for creditors.

FAMILY LAW AND BANKRUPTCY PROCEEDINGS

When bankruptcy affects a property settlement, the courts can still make orders about how assets are divided, but the trustee has the option of being involved in the process. Bankruptcy proceedings themselves are generally managed in the Federal Court of Australia or in Division 2 of the Federal Circuit and Family Court of Australia, but can also be dealt with by Division 1 of the Federal Circuit and Family Court of Australia.

The family law proceedings and the bankruptcy proceedings can be determined together in the one court. It is more common though that the bankruptcy proceedings will have been resolved, either by a Personal Insolvency Agreement or the making of a sequestration order (a bankruptcy order), before the family law proceedings have commenced or while they are still ongoing.

WHAT IS THE TRUSTEE’S ROLE IN FAMILY PROPERTY SETTLEMENTS?

In family law, a bankruptcy trustee represents the interests of the creditors and takes control of the bankrupt’s property. The trustee may join the property settlement proceedings to ensure the creditors’ rights are considered when dividing assets between the separating couple.

In Australian bankruptcy matters, a trustee is usually appointed in one of two ways:

1. Voluntary bankruptcy (made via a debtor’s petition):

• The bankrupt can choose a registered trustee (a private insolvency professional); or
• The Australian Financial Security Authority (AFSA) appoints a trustee.

2. Creditor-initiated bankruptcy (made via a bankrupt’s creditors):

• The Official Trustee in Bankruptcy (through AFSA) is usually appointed by default.
• A private trustee may be used if nominated and accepted.

UNDERSTANDING VESTED PROPERTY

The property which is automatically transferred to the ownership of the trustee in bankruptcy when someone is declared bankrupt is called the vested property of the bankrupt.

All property the bankrupt owns at that time automatically vests in the trustee except if it is exempt property.

This means the trustee legally controls and manages the property to pay off creditors. The bankrupt no longer has ownership or authority over these assets.

Vested bankruptcy property includes things like:

• Real estate (including the family home, investment property and commercial premises)
• Motor vehicles (over a certain value)
• Money in bank accounts
• Shares or investments
• Other valuable assets

Exampt property includes things like:

• Most household items
• A modest motor vehicle
• Tools of trade (to a certain value)
• Superannuation (in most cases)
• Property held on trust for another (or on their behalf). The trustee will require proof of the trust

What About Jointly Owned Property?

If one spouse is not bankrupt and owns half of the family home, or other assets, and the other spouse becomes bankrupt, here’s what happens:

• The bankrupt’s half-share becomes vested in the trustee – the trustee legally controls that half.
• The non-bankrupt spouse still owns their half; bankruptcy doesn’t affect their ownership.
• The trustee may want to sell the whole property to access the bankrupt spouse’s share and pay creditors.
• The non-bankrupt spouse may be asked to agree to a sale, or they can offer to buy out the trustee’s share.
• If they can’t agree, the trustee can ask the court to order a sale, including the non-bankrupt spouse’s half (under co-ownership laws).

In short, the non-bankrupt spouse still owns their share, but will likely face pressure to sell or negotiate with the trustee.

The non-bankrupt spouse may try to establish to the trustee or to a court that they should be entitled to more than half due to the operation of principles under the FLA or equitable principles such as a constructive trust.

What About Property Owned Solely by the Non-Bankrupt Spouse?

This depends. Property owned solely by the non-bankrupt spouse does not vest in the trustee upon the bankruptcy. The trustee might, however, seek that some of the non-bankrupt’s property:

• Be used to pay debts which the non-bankrupt spouse has benefited from. For example, the non-payment of the bankrupt’s tax because this resuted in there being more income for the family; or
• Be “clawed” back to the bankrupt’s estate under the relation back principles of the Bankruptcy Act.

How Else Can Bankruptcy Matters Affect Family Law Proceedings?

When a spouse files for bankruptcy during family law proceedings in Australia, a few things (listed below) may happen.

Automatic Impact on Property

If a spouse is declared bankrupt, their property generally vests (or transfers) to a bankruptcy trustee, meaning it is controlled by the trustee and can’t be used in family law property settlements unless a court decides otherwise.

Suspension of Family Law Proceedings

Bankruptcy may halt some family law proceedings, particularly if the bankruptcy trustee gets involved. The bankruptcy trustee has control over the bankrupt’s assets, and family law orders involving those assets can’t be made without the trustee’s involvement. The trustee may decide that he or she doesn’t want to be involved in the family law proceedings. This decision may be made because the trustee doesn’t believe it is worthwhile and/or the creditors may not be prepared to pay for lawyers.

Claims Against Property Vested in the Trustee

The spouse who is not bankrupt can still make a claim on the property which has vested in the trustee, but they might face delays as the bankruptcy trustee needs to assess and deal with the property. In some cases, the non-bankrupt spouse can claim that certain property should be excluded from the bankruptcy and transferred to the non-bankrupt spouse.

Property Settlement Outcomes

If the bankruptcy occurs after property settlement proceedings have begun but before an agreement or final order is made, the court can make orders about property. It must consider the usual matters under s 79 and 90SM of the FLA. It will weigh up the spouses’ contributions and their current and future circumstances. Of particular relevance will be:

• The nature of the debts.
• Whether, in making a property settlement order, the creditors may not be paid.
• Whether the non-bankrupt spouse benefited from the bankrupt’s debts. For example, non-payment of income tax meant that the bankrupt was able to pay the mortgage or buy other property.
• Whether there was family violence, including financial or economic abuse.
• The circumstances of the incurring of the debts.
• Whether the incurring of the debts amounts to material wastage.

Creditors’ Claims

If the bankrupt spouse transferred property to the non-bankrupt spouse before applying for bankruptcy with the intention to defeat the claims of creditors, the bankruptcy trustee can take action to set aside that transfer. There are options under the Bankruptcy Act and the FLA.

Costs & Disputes

Bankruptcy often complicates proceedings, especially if the bankrupt is uncooperative or if third parties like trustees or liquidators are involved. The Federal Circuit and Family Court of Australia rarely makes orders regarding costs, but these are more likely when third parties such as bankruptcy trustees are involved in the proceedings.

In short, bankruptcy adds complexity to family law proceedings, and it can delay or change how property is divided. The bankruptcy trustee becomes a key player in these cases, and both spouses may need to deal with the trustee’s involvement and any potential claims against the property.

WHOSE FINANCIAL INTERESTS TAKE PRIORITY, THE NON-BANKRUPT SPOUSE OR THE CREDITORS?

When one spouse becomes bankrupt, creditors generally take priority over the bankrupt’s share. The trustee controls the bankrupt’s assets, including the bankrupt’s share of jointly owned property, to repay debts.

The non-bankrupt spouse’s rights do not override those of the trustee and the trustee’s rights do not override those of the non-bankrupt spouse.

If the non-bankrupt spouse believes that they have a claim of some of the bankrupt’s property, the non-bankrupt spouse will need to either negotiate a settlement with the trustee or make a claim in court.

The court needs to weight up all the factors and reach a decision which is just and equitable.

What Happens When the Bankrupt is in the Midst of a Property Settlement with Their Ex-Partner?

If a person files for bankruptcy during property settlement proceedings, the situation is more complicated, as the bankrupt’s property vests in the trustee in bankruptcy and the property settlement proceedings are automatically suspended until the trustee in bankruptcy has decided whether to continue in the proceedings. This means that any of the bankrupt’s property in the current family law proceedings is overseen by the trustee, rather than automatically considered as part of the shared property pool.

Automatic Vesting of Assets

When a spouse is declared bankrupt, their assets vest in the bankruptcy trustee. This means that the bankrupt spouse’s share of the property pool that was being considered in the family law proceedings effectively passes to the trustee, who takes control of those assets. The trustee will then assess how the property can be used to pay the bankrupt’s creditors.

Possible Suspension or Delay in Family Law Proceedings

The family law property settlement proceedings are suspended or delayed because the bankruptcy trustee must be notified of the proceedings. This means that the proceedings will need to be put on hold until the trustee has been served with the court documents and has had time to make a decision as to whether the trustee will be involved in and continue with the proceedings.

Continuation Of Family Law Proceedings If Assets Can Be Sold

The bankruptcy trustee may decide to continue with the property settlement proceedings if it seeks to retain assets that vested in the trustee that could be used to pay off the bankrupt’s debts. The trustee might also seek to intervene in the family law proceedings if it believes there are assets that should be returned to the bankruptcy estate to be divided among creditors.

Potential Exclusion Of Certain Assets

In some cases, the non-bankrupt spouse might argue that certain assets should not be part of the bankrupt estate. If the asset was transferred to the non-bankrupt spouse before the bankruptcy the court will rule on whether the transfer was valid or was done to defeat the claims of creditors.

Intervention Of Creditors To Set Aside Previous Property Transfers

If the bankrupt spouse’s actions in the property settlement were intended to defraud or defeat creditors (such as transferring assets to the ex-spouse to hide them), creditors or the bankruptcy trustee may seek to set aside those transfers. This can involve legal proceedings to reverse the transfer of assets that was made with the intent of avoiding claims by creditors.

Negotiations Between The Non-Bankrupt Spouse & Trustee

Essentially, bankruptcy during property settlement proceedings means the bankruptcy trustee becomes a key player in the family law matter and can decide to be a party to the proceedings. Because the bankruptcy trustee controls the bankrupt spouse’s share of the property, the non-bankrupt spouse will likely need to work with the trustee to reach a resolution if the non-bankrupt spouse wants to claim against the bankrupt’s property. In our experience, it is rare for the non-bankrupt spouse to end up with nothing even if the total of the bankrupt spouse’s debts exceed all of the property.

LEGAL STEPS IF YOU ARE MANAGING PROPERTY SETTLEMENT AND BANKRUPTCY

When dealing with divorce or separation while applying for bankruptcy in Australia, it’s important to understand the process and steps you need to take to ensure that both the family law and bankruptcy matters are appropriately addressed. Here’s a breakdown of the actions that may be appropriate for you, whether you are the bankrupt or the non-bankrupt:

1. Seek Advice On Both Divorce/Separation & Bankruptcy

• Family lawyer: It’s crucial to consult with a family lawyer who has experience in handling property settlements, especially in situations involving bankruptcy.
• Bankruptcy trustee: Similarly, it is essential to speak to a bankruptcy trustee or insolvency practitioner to understand the implications of bankruptcy for your assets and debts.
• Financial advisor: Bankruptcy by either party during separation can have significant impacts on your financial future and retirement options, and a financial advisor can help to strategically plan around the challenges.

2. Commence Property Settlement Proceedings

• Take steps to obtain a property settlement: If you are already separated and trying to work out a property settlement with your ex-spouse or, if the bankruptcy has aready occurred, with their trustee in bankruptcy, you should start negotiating and, if necessary, apply to the Federal Circuit and Family Court of Australia for a property division. Before making that application you will likely need to comply with the pre-action procedures, which require you to take part in dispute resolution, exchange disclosure and make an offer to settle.
• Initiate divorce proceedings (if the marriage has broken down completely): You can file for divorce if you’ve been separated for at least 12 months. This can be particularly important if the trustee is suspicious as to whether or not the separation is a sham designed to defraud creditors.

Key consideration: If you’re in the process of finalising a property settlement and bankruptcy occurs, it will affect the distribution of assets.

3. Applying for Bankruptcy

There are two ways that bankruptcy occurs, which are:

• Voluntary bankruptcy application: You will need to lodge a bankruptcy application (known as a debtor’s petition) and a Statement of Affairs with AFSA if you are unable to pay your debts. Before lodging these documents you should obtain legal advice from a family lawyer as the bankruptcy may impact the family law property entitlements of you and your former spouse. Once you are officially bankrupt, a trustee will be appointed to oversee your assets and liabilities.
• Consider Timing: Applying for bankruptcy during divorce or separation can complicate matters. It’s generally advised to consult a bankruptcy trustee and a family lawyer about the timing of your bankruptcy, as it can impact property settlement proceedings.

4. Disclose Bankruptcy To The Court

If you are bankrupt you must disclose your bankruptcy status to the court.

If the bankrupt spouse does not disclose it, the non-bankrupt spouse should do it.

Note: If property settlement proceedings are already in progress, the court may delay or pause the proceedings until the bankruptcy trustee is notified and has had an opportunity to decide how the bankrupt’s estate will be handled.

5. Bankruptcy Trustee Takes Control of Certain Assets

Upon being declared bankrupt, certain assets vest in the bankruptcy trustee. These assets can be assets held solely by the bankrupt or the bankrupt’s share of joint assets. This means the bankrupt’s share of the property pool in the family law matter may be controlled by the trustee and used to pay off the bankrupt’s debts. An assessment will need to be made as to the non-bankrupt spouse’s liability for the bankrupt’s debts.

Exceptions: Certain assets may be excluded from the bankruptcy estate (such as most superannuation, property held on trust by the bankrupt for other people, household goods and motor vehicles to a certain value). The bankrupt will need to work with both the bankruptcy trustee and their family lawyer to determine which assets are available for division and which aren’t.

6. Property Settlement May Be Impacted By Bankruptcy

To protect any assets which are part of the bankrupt estate, the bankruptcy trustee will decide to intervene in the property settlement. Family law property settlement proceedings will be suspended while the trustee decides what to do. The court needs to assess the liability of the non-bankrupt spouse to contribute to the bankrupt’s debts and the non-bankrupt spouse’s claim on the bankrupt’s property.

Important: If there’s any suspicion that property has been transferred to avoid bankruptcy or to prevent creditors from claiming it, the bankruptcy trustee or the court may seek to set aside any such transfers. There are options under both the FLA and the Bankruptcy Act.

7. Determine The Role Of Creditors & The Trustee

• The trustee is responsible for ensuring the debts are paid. In court proceedings it may be found that the non-bankrupt spouse’s property may be used to pay off some of the bankrupt’s debts if the bankrupt’s debts are greater than the bankrupt’s property.
• The bankruptcy trustee will also consider any potential claims to defraud creditors, which may involve undoing certain transactions made during or just before the bankruptcy.

8. Continue Family Law Proceedings (If Applicable)

• If your property settlement proceedings are still ongoing or have not been finalised, the court will need to consider the status of the bankruptcy when dividing assets.

If the bankruptcy happens before the final settlement, the court gives the bankruptcy trustee time to determine what assets are available and the debts which need to be paid.

9. Finalise The Settlement Or Order

In our experience, these cases usually settle by negotiation between the trustee and the non-bankrupt spouse. If the non-bankrupt spouse and the trustee reach agreement a final court order can be made. The agreement may involve such matters as:

• The non-bankrupt spouse agreeing to contribute to the bankrupt’s debts.
• The trustee ageeing to transfer property from the bankrupt estate to the non-bankrupt’s estate.
• Property being sold so creditors can be paid.
• The trustee agreeing that the non-bankrupt spouse does not need to contribute to the bankrupt’s debts.

If agreement cannot be reached then a court decision is required.

10. Once The Bankruptcy Ends

The bankrupt may not recognise the claims of the non-bankrupt spouse with respect to the property which has vested in the trustee unless there is a court order confirming the claims of the non-bankrupt spouse are valid and the bankrupt is bound by that order.

During the bankrupcty, the non-bankrupt spouse will have been entitled to have a say in what happens to non-vested property such as superannuation as the trustee does not control this. However, as the bankrupt may not have been involved in formalising any agreement between the trustee and the non-bankrupt spouse the bankrupt may try to make a claim after the bankruptcy ends. Non-bankrupt spouses need legal advice as to how best to protect themselves from such claims.

IF YOUR EX-SPOUSE BECOMES BANKRUPT DURING PROPERTY SETTLEMENT, WHAT STEPS SHOULD YOU TAKE TO ENSURE A FAIR PROPERTY SETTLEMENT IF POSSIBLE?

If your ex-spouse becomes bankrupt during property settlement proceedings in Australia, matters can be complicated significantly. However, there are steps you can take to ensure a fair property settlement, or at least to protect your interests as much as possible. Here’s a breakdown of what you should do:

1. Seek Immediate Legal Advice

• Family lawyer: Contact your family lawyer immediately to understand the implications of your ex-spouse’s bankruptcy on the ongoing property settlement proceedings. They will be able to guide you on the next steps and ensure your interests are protected.
• Insolvency practitioner: It may also be necessary to consult with an insolvency practitioner or bankruptcy lawyer who can explain how bankruptcy affects the assets in question and your ability to make claims.

2. Ensure Full Disclosure Of Assets

• Request full disclosure: Ensure that your ex-spouse provides full disclosure of all assets, including any that might have been hidden or transferred to avoid bankruptcy. The bankruptcy trustee may help in recovering hidden assets.
• Investigate property transfers: If there is a suspicion that property or assets were transferred to a third party before the bankruptcy (to prevent them from being included in the bankrupt estate), you may want to investigate those transfers and potentially ask the court to set them aside.

3. Understand the Role Of The Bankruptcy Trustee

• Vesting of assets: When someone is declared bankrupt, their assets (unless exempt) are vested in the bankruptcy trustee, who becomes responsible for managing those assets. This means that your ex-spouse’s share of the property pool may no longer be in their control.
• Interaction with trustee: Work closely with the bankruptcy trustee to understand which assets are available for division, the debts which the trustee is seeking to be paid and whether any assets are exempt. You may need to state your case to the trustee to ensure your claim to a fair property settlement is recognised.
• Trustee’s role in aamily law: The bankruptcy trustee may have a say in the property settlement, as they control the bankrupt’s property and are responsible for paying your ex-spouse’s debts. You need to be proactive in ensuring that the trustee’s actions do not disadvantage your share of the property settlement.

4. Determine What Assets Are Protected

• Assets exempt from bankruptcy: Some assets may be protected from the bankruptcy estate, such as most superannuation, personal injury claims, motor vehicles, household goods, tools of trade and property held on trust. Understand which assets are excluded from the bankruptcy estate and how these might be relevant in the property settlement.
• Seek court orders on exemptions: If there are assets that should be excluded from the bankruptcy estate, work with your lawyer to make an application to the court to exclude them from the trustee’s control. You can still claim them even if the trustee cannot. Superannuation is often particularly important as exempt property.

5. Seek Court Orders To Protect Your Interests

• Property settlement application: You can apply to the court for orders to finalise the property settlement before the bankruptcy trustee has finalised the bankruptcy.
• Look at all options: Obtain legal advice on how your rights will be better protected e.g. family law proceedings, bankruptcy proceedings or an equitable claim.
• Interim Orders: If the property settlement cannot be finalised immediately, seek interim orders to protect your interests, especially if there is a risk that the assets will be sold off or liquidated to pay creditors.

6. Investigate Fraudulent Or Undervaluation Of Assets, If Necessary

• Claims of fraudulent transfers: If your ex-spouse transferred property or assets to a third party to avoid the bankruptcy process or to defraud creditors, you can seek to have those transfers undone. The court and bankruptcy trustee may investigate claims of fraudulent transfers or undervaluing of assets.

7. Consider How The Bankruptcy Affects Debts

• Debt responsibility: The bankruptcy may impact how debts are divided between you and/or the trustee. While your ex-spouse’s debts may be covered by the bankruptcy, the court or the trustee may still seek that you contribute to them. Any joint debts will still need to be addressed in the property settlement.
• Joint liabilities: If there are joint debts, you may need to negotiate with the bankruptcy trustee and your ex-spouse’s creditors to determine who will be responsible for paying them off. You may need to resolve the issue of who will take on the responsibility for debts in the settlement. If you have benefited from the non-payment by the bankrupt of the bankrupt’s debts, such as tax, the trustee in bankruptcy may expect you to contribute to the debts from your property.
• Secured debts: Debts such as mortgage liabilities are “secured” meaning that they can be paid from the sale of the property. Secured creditors do not usually claim in the bankrupt estate.

8. Secure Your Claim For Property

• Priority for payment: As part of your divorce or property settlement proceedings, you need to ensure that your claim to specific property is prioritised before any creditors. This might involve requesting the court to allocate certain assets to you to ensure the settlement is fair and equitable, especially if the bankruptcy reduces the available property pool.
• “Clawback” provisions: Be aware of the possibility that the bankruptcy trustee might attempt to reclaim assets that were transferred by the bankrupt before the bankruptcy. If property was transferred to you as part of an informal or formal separation agreement before bankruptcy, the trustee might try to reclaim it. Legal action could be necessary to defend your property, depending on the circumstances.
• FLA claims: Gather evidence to support your claims with respect to:
  • Your contributions to property held in the name of the bankrupt;
  • Your contributions to property held in joint names;
  • The current and future considerations such as:
    • Your income and earning capacity;
    • The care of children;
    • Liabilities;
    • Any wastage by the bankrupt eg. gambling and reckless decisions.

9. Consider Alternative Dispute Resolution (ADR)

• Mediation or negotiation in bankruptcy: If bankruptcy proceedings make it harder to settle the property dispute, you may want to consider using alternative dispute resolution (ADR) methods, such as mediation or arbitration, to resolve the matter without prolonged court proceedings. It may be possible to mediate a resolution that satisfies both the bankruptcy trustee’s duties and your desire for a fair property settlement.

KEY TAKEAWAYS FOR NON-BANKRUPT SPOUSE:

1. Act quickly and consult with advice from a family lawyer with knowledge of bankruptcy law and practice and perhaps an insolvency practitioner.
2. Ensure full disclosure of all assets and investigate any hidden or transferred property interests or assets.
3. Work with the bankruptcy trustee to understand what assets are available, which are exempt and the assets you might have a claim on.
4. Consider seeking urgent property orders to protect your interests and finalise the property settlement.
5. Clarify liability for the debts of the bankrupt and ensure they are properly allocated in the settlement.
6. Consider ADR to resolve disputes outside of court if possible.

Navigating bankruptcy during a family law property settlement can be complex, but with the right legal advice and action, you can protect your interests and work towards a fair resolution.

DO PEOPLE APPLY FOR BANKRUPTCY TO AVOID PROPERTY SETTLEMENT?

Yes, people do occasionally apply for bankruptcy to avoid or delay a family law property settlement and deplete the property pool available to the non-bankrupt spouse. Australian family law courts treat this very cautiously. Bankruptcy does not automatically erase obligations under the FLA, and courts can make orders to ensure a fair property settlement despite insolvency.

The court and bankruptcy trustee have mechanisms in place to prevent abuse, and the bankrupt’s actions will be scrutinised. Additionally, the court can still make property settlement orders that may address the property of the bankrupt which has vested in the trustee.

If you believe that your ex-partner is using bankruptcy as a strategy to avoid a fair settlement, it’s crucial to seek legal advice immediately. It is sometimes not difficult to establish that someone is insolvent, so a bankrupty can be impossible to “undo”. It is preferable to seek injunctions to prevent the bankruptcy in the first place. A family lawyer or a bankruptcy lawyer can help protect your rights and ensure that the property settlement process is fair and equitable.

If the bankruptcy has already occurred it may be possible in some cases for the debts to be paid off and the bankruptcy annulled. This will mean that the trustee is not involved in the family law proceedings.

HOW DOES APPLYING FOR BANKRUPTCY AFFECT CLAIMS FOR CHILD SUPPORT OR SPOUSAL MAINTENANCE?

Applying for bankruptcy can have significant implications for claims relating to child support or spousal maintenance in Australia, though it doesn’t automatically negate or eliminate those obligations. Here’s how bankruptcy can affect these claims:

Child Support:

1. Child support obligation remains: A person’s bankruptcy does not extinguish their child support obligation. Child support is considered a priority debt, meaning it must be paid even after bankruptcy. Services Australia (Child Support) will continue to pursue child support payments from a bankrupt.
2. Bankruptcy doesn’t affect enforcement: Even if someone is bankrupt, the government will continue to enforce child support payments. The bankruptcy trustee cannot discharge child support debts, nor can they be forgiven through bankruptcy proceedings. If the bankrupt owes child support arrears, the trustee may not be able to discharge that debt, and the government can take enforcement actions.
3. Income and payments: While bankruptcy might affect the bankrupt’s financial management and future earnings, it does not alter the fact that they must continue to pay child support. If the bankrupt is earning income, that income can still be used to calculate and enforce their child support obligations.
4. Maintenance and support: If someone is receiving child support from a bankrupt, their entitlement to the child support payments remains, and they can seek assistance from Child Support to collect the payments.

Spousal Maintenance:

1. Spousal maintenance claims continue: A claim for spousal maintenance is a separate obligation from the bankrupt’s bankruptcy, meaning that bankruptcy does not automatically eliminate spousal maintenance responsibilities. The bankrupt may need to continue to pay spousal maintenance if ordered to do so by the court, or if there is an agreement in place.
2. Impact on ability to pay: If a bankrupt has already been ordered to pay spousal maintenance, bankruptcy may affect their ability to continue making payments due to the restrictions on their financial situation. The bankruptcy trustee will manage the bankrupt’s finances and assets, so the bankrupt may have limited resources available to meet spousal maintenance obligations.
3. Variation in payments: If the bankrupt is unable to continue paying the same level of spousal maintenance because of their reduced income or assets post-bankruptcy, they may apply to the court to vary the spousal maintenance order based on their new financial situation. The court will assess their capacity to pay in light of their bankruptcy and financial position.
4. Consideration of bankruptcy: If bankruptcy impacts a person’s ability to earn income or significantly reduces their assets, the court may adjust the maintenance order to reflect the bankrupt’s changed circumstances.
5. Effect on enforcement: While bankruptcy does not discharge spousal maintenance obligations, enforcement can be impacted. The bankruptcy trustee may not be able to recover funds or assets from the bankrupt estate to satisfy maintenance payments. However, if the bankrupt has post-bankruptcy income or assets, spousal maintenance may be paid from these.

In short, child support and spousal maintenance cannot be wiped out by bankruptcy. If a bankrupt’s finances are limited, meeting these obligations may become harder, and the recipient may need to seek enforcement or request a modification.

A bankrupt’s income is assessed and can be used to satisfy child support or spousal maintenance. Post-bankruptcy income may also be partially used to pay creditors, but child support continues to be enforced by Child Support.

If you’re involved in a bankruptcy situation where child support or spousal maintenance proceedings are involved, it’s crucial to seek legal advice to understand your options for enforcing or modifying these obligations.

NOTIFICATION REQUIREMENTS FOR BANKRUPTCY IN FAMILY LAW PROCEEDINGS

In family law proceedings, bankrupt parties must notify the bankruptcy trustee, other parties and the court about their bankruptcy within 7 days of becoming bankrupt (or a debtor subject to a personal insolvency agreement). The notification must include the relevant case details and the date of the next court event.

Failure to notify could impact the proceedings. Similarly, in situations where no bankruptcy exists, creditors must be informed if the court’s financial order might affect their payments. These obligations are set out in the Federal Circuit and Family Court of Australia (Family Law) Rules 2021.

When someone is involved in family law proceedings (like property settlements or divorce) and they are also bankrupt or subject to a personal insolvency agreement, there are certain notification requirements:

1. Obligations to notify: The bankrupt must notify:
   • The other parties in the family law case (in writing)
   • The bankruptcy trustee or trustee handling the personal insolvency agreement
   • The court overseeing the family law case
2. Timeframe for notification:
   • This must be done within 7 days (or as soon as possible) after the party becomes bankrupt or enters into a personal insolvency agreement
   • The notice must include copies of relevant documents, such as the court application, responses, and the date of the next court event

These rules ensure that the bankruptcy status is taken into account in family law proceedings, as it can affect how property settlements or financial agreements are handled.

Additionally, the bankrupt has a similar obligation to notify the court and other parties if they become involved in bankruptcy proceedings.

TRUSTEE’S ROLE IN BANKRUPTCY AND FAMILY LAW PROCEEDINGS

1. Trustee’s rights under the FLA: A bankruptcy trustee cannot commence property settlement proceedings under sections 79 or 90SM of the Family Law Act (FLA), as these sections grant personal rights to the parties (not the trustee). The trustee can, however, be involved if the proceedings have already started and may have options to make claims to recover property under the bankruptcy laws.
2. Trustee’s limited role: If a bankruptcy occurs, and no family law proceedings have been initiated by the non-bankrupt spouse, the trustee has limited options. They can only pursue claims under the Bankruptcy Act or related equitable claims, rather than directly using family law provisions like sections 79 or 90SM.
3. Non-bankrupt spouse’s needs vs creditors: When one spouse is bankrupt, the court often balances the needs of the non-bankrupt spouse against the rights of the trustee acting for creditors. In many cases, the non-bankrupt spouse is able to reclaim property vested in the trustee because of the factors under the FLA, including financial and non-financial contributions and current and future considerations. These are carefully weighed to ensure a fair outcome.
4. Cooperation with the trustee: A key challenge for the trustee is whether the bankrupt spouse will cooperate. The bankrupt’s willingness to provide information or evidence can significantly impact the outcome, either helping the trustee’s claims or hindering them.
5. Impact of large debts: Many cases involve situations where the bankrupt’s debts are far greater than the value of their property. This creates challenges because creditors may not be paid in full, and it raises the question of whether the non-bankrupt spouse should have some liability.

SETTING ASIDE FINANCIAL AGREEMENTS

Section 90K(1)(aa) and 90UM(1)(b) of the FLA allows financial agreements to be set aside if made to defraud creditors or with reckless disregard for their interests. A trustee in bankruptcy typically can’t use FLA provisions to set aside financial agreements unless the bankrupt is still in bankruptcy. After discharge, the trustee must act under the Bankruptcy Act.

The courts have confirmed that the Official Trustee in Bankruptcy can pursue claims in courts outside family law, but does not automatically have rights under the FLA to institute property settlement proceedings.

Recent updates to the Bankruptcy Act clarify when a third party can ask a court to set aside a financial agreement. However, sections 90K and 90UM(1) of the FLA, which deal with setting aside financial agreements in family law, have not changed. This means a trustee may have rights under s 40(1)(o) of the Bankruptcy Act rather than the FLA.

Trustees and non-bankrupt spouses must carefully navigate both family law and bankruptcy law when dealing property or financial claims.

NEED HELP WITH ADDRESSING BANKRUPTCY DURING FAMILY LAW PROCEEDINGS?

If you’re facing property, child support or spousal maintenance issues in the context of bankruptcy and separation, Forte Family Lawyers has extensive experience with complex financial settlements including bankruptcy, liquidations and receiverships. We provide clear guidance, protect your rights and work to achieve fair outcomes tailored to your circumstances.

Contact us today to schedule a consultation and take the first step towards securing your future.