Divisible and non-divisible property and the periods that apply.
This article looks at bankruptcy and which assets a bankruptcy trustee can realise (i.e. sell). The Bankruptcy Act 1966 defines assets into two categories:
- Divisible-assets available to a trustee.
- Non-divisible-assets not available to a trustee.
Understandably, the issue of whether an asset is divisible is frequently contested.
Section 58 of the Bankruptcy Act does not define what is or is not divisible property, only that all divisible property vests in the bankruptcy trustee. A bankruptcy trustee considers divisible property as all the property of the bankrupt, then, eliminates non-divisible assets from the list.
The Bankruptcy Act broadly defines divisible property as covering the following:
- All property owned at the time of bankruptcy, or acquired during the bankruptcy.
- Any rights or powers over property that existed at the date of bankruptcy, or during the bankruptcy.
- Any rights to exercise powers over property.
- Any property that vests because an associated entity received the property resulting from personal services supplied by the bankrupt (section 139D of the Bankruptcy Act).
- Monies recovered from an associated entity due to an increase in the net worth of the entity resulting from personal services supplied by the bankrupt (section 139E of the Bankruptcy Act).
Section 116 of the Bankruptcy Act lists what classes of assets are also divisible among creditors.
Bankruptcy Act 1966 - section 116
Property divisible among creditors
- Subject to this Act:
- all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
- the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her Discharge; and
- property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D or 139DA; and
- money that is paid to the trustee of the bankrupt's estate under an order under section 139E or 139EA; and
- money that is paid to the trustee of the bankrupt's estate under an order under paragraph 128K(1) (b); and
- money that is paid to the trustee of the bankrupt's estate under a section 139ZQ notice that relates to a transaction that is void against the trustee under section 128C; and
- money that is paid to the trustee of the bankrupt's estate under an order under section 139ZU; is property divisible amongst the creditors of the bankrupt.
What is non-divisible property?
Determining what is not divisible property can be a difficult area.
The Bankruptcy Act provides that some property types will not be divisible among creditors under Section 116(2).
The list of non-divisible assets is extensive, but in most cases, these assets rarely appear. Some are quite common and are non-divisible because they are necessary for the bankrupt's ability to maintain a standard of living.
These can be grouped into the following areas:
Property held by the bankrupt in trust for another person (i.e. not owned by the bankrupt).
- The bankrupt's household property.
- Personal property that has sentimental value for the bankrupt and is identified by a special resolution passed by the creditors before the trustee realises the property.
- The tools of trade that the bankrupt uses in earning income by personal exertion—subject to the value threshold.
- A vehicle used by the bankrupt as a means of transport—subject to the value threshold.
- Policies of life assurance or endowment assurance covering the life of the bankrupt or their spouse, whether the proceeds are received on or after the date of the bankruptcy.
- The bankrupt's interest in a regulated superannuation fund.
- A payment to the bankrupt under a payment split under Part VIIIB of the Family Law Act 1975, where the eligible superannuation plan is a fund or scheme covered by the Act and the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993.
- Money held in the bankrupt's retirement savings account (RSA)-or a payment to a bankrupt from an RSA received on or after the date of the bankruptcy—if the payment is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997.
- A payment to the bankrupt under a payment split under Part
VIIIB of the
Family Law Act where the eligible superannuation plan involved is an RSA, and the payment involved is not a pension or annuity within the meaning of the Retirement Savings Accounts Act.
- Any right to recover damages or compensation (or amounts received before or after bankruptcy) for personal injury or wrongdoing or regarding the death of the bankrupt's spouse, de factor partner, or family member.
- Amounts paid to the bankrupt under a rural support scheme as prescribed by the Act.
- Amounts paid to the bankrupt by the Commonwealth as compensation in relation to loss as prescribed by the Act relating to the rural support scheme.
- Property that was purchased or acquired with protected money.
- Any property that, under an order—under either Part VIII, or Part VIIIAB of the Family Law Act 1975—the trustee is required to transfer to the bankrupt's spouse or a former spouse, or former de facto partner.
- The bankrupt's property that is a support for the bankrupt that was funded under the National Disability Insurance Scheme (NDIS), or NDIS amount as defined in that Act.
Some divisible property is subject to statutory value thresholds, which is indexed by the Australian Financial Security Authority (AFSA). Click here to find these thresholds on our website.
The thresholds are designed to allow bankrupts to maintain a standard of living (the household property limitations), and maintain some employment (the tools of trade and motor vehicle limitations).
Time limits for realisation
Section 129AA of the Bankruptcy Act sets the periods that apply to divisible assets for the bankruptcy trustee to deal with these assets. Any divisible assets a bankrupt discloses must be realised within six years after the bankrupt is discharged. A bankruptcy trustee can extend this period up to three years at a time by giving written notice to the bankrupt before the six-year expiry. There is no limit on how many extensions a bankruptcy trustee can seek.
For after-acquired property disclosed during bankruptcy, the bankruptcy trustee has six years after the bankrupt's discharge date to deal with the property. For any after-acquired property a bankrupt discloses after discharge, the bankruptcy trustee has six years from the disclosure date to realise the property. Again, a bankruptcy trustee can extend these periods.
If these assets are not dealt with during the required period, they can revest to the bankrupt.
Section 127 of the Bankruptcy Act outlines that a trustee has 20 years from the date of bankruptcy to deal with a bankrupt's property. After the 20 years' expiry, the property revests to the bankrupt.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.