Dividing property after partners separate is generally stressful, with each party concerned about his or her financial future. The bankruptcy of one party adds a further dimension of complexity to a family law property settlement.

Even partners whose relationship is intact should seek urgent legal advice if one of them is facing bankruptcy or insolvency issues. In particular, the non-bankrupt party should take immediate action to protect his or her interests in assets.

This article explains how bankruptcy laws can apply to insolvent individuals, how property is usually divided after a relationship breaks down, and how the processes interact when one of the parties to a property settlement is bankrupt.

What happens when a person becomes bankrupt?

A person is considered bankrupt when he or she is unable to pay his or her debts. Apart from certain protected property, the bankrupt’s assets vest in an appointed trustee in bankruptcy who may deal with those assets to satisfy the claims of creditors. Protected assets generally include clothing, certain personal possessions, tools of trade, a motor vehicle to a prescribed value, awards of compensation and superannuation and life policies.

Essentially, the trustee controls the bankrupt’s financial affairs during the period of bankruptcy.

How is property divided after a relationship breakdown?

The division of property after a relationship breakdown essentially requires a four-step process to:

  • identify the parties’ pool of assets available for distribution;
  • determine the parties’ respective financial and non-financial contributions;
  • consider the parties’ future needs; and
  • determine a split that is, in all the circumstances, just and equitable. 

What happens when one of the parties to a property settlement is bankrupt?

When a relationship breaks down and one of the parties is bankrupt, the interplay of the Bankruptcy Act 1966 which regulates individual bankruptcy, and the Family Law Act 1975 which governs the division of property, must be considered.

The Family Law Act enables a person to apply for the alteration of property interests after the breakdown of a relationship, and specifically includes circumstances where property is vested in a trustee in bankruptcy if one of the partners is bankrupt.

This allows the Court to alter the interests of property in a way that takes into consideration the non-bankrupt partner’s interest that might otherwise be dealt with by the bankruptcy trustee. The legal title  or ownership of the property in such circumstances will likely have less relevance.

The interests in the family home of a non-bankrupt party may also be protected. The family home is generally not a protected asset however, and the bankrupt’s interest is available to a trustee to satisfy his or her creditors. Although, where legal title to a family home is held solely by a bankrupt, the Court may nevertheless conclude that the home is held jointly with a spouse or former spouse thereby protecting the interest of the non-bankrupt party.

A person affected by an order or proposed order in Family Law proceedings such as a creditor, may apply to have it varied or set aside. In some circumstances, a trustee in bankruptcy will apply to be joined as a party to the proceedings and to have orders set aside. This could result in the recovery of certain assets to satisfy creditors.

The Courts must balance the competing rights of the creditors and the non-bankrupt spouse party and make orders that are just and equitable in all of the circumstances. It will take into account a range of factors including:

  • the non-bankrupt partner’s direct and indirect financial and non-financial contributions to the assets of the relationship;
  • the effect of a proposed order upon either party to the relationship;
  • the future needs of the non-bankrupt party including the responsibility for caring for children, employment status and health;
  • the effect any orders will have on creditors of the bankrupt person including whether the debt will be repaid in full.

The need to achieve a just and equitable outcome may result in the non-bankrupt partner and his or her dependants obtaining a share of certain assets that would otherwise be vested in the bankruptcy trustee, to the detriment of the creditors.

Key takeaways

  • The property of a bankrupt individual vests in the trustee in bankruptcy for distribution between creditors.
  • The ex-spouse of a bankrupt person may pursue a property division in Family Law proceedings despite the bankruptcy.
  • Court proceedings for a family law property settlement when one partner is bankrupt will generally be between the non-bankrupt party and the trustee in bankruptcy.
  • In such proceedings, the Court may be required to determine:

–       applications by the non-bankrupt party to restrain the trustee from dealing with certain property and / or distributing funds amongst creditors;

–       claims that property vested in the trustee and otherwise available to satisfy creditors should be altered for the benefit of the non-bankrupt partner;

–       claims that exempt property or property not vested in the trustee should be made available for distribution to creditors.

If you or your partner are facing insolvency issues, whether or not your relationship has ended, or is likely to end, you should obtain immediate legal advice.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 8344 6422 or email admin@donlanlawyers.com.