Australia: Help! my spouse has become bankrupt. How does this affect my entitlements as the non-bankrupt spouse

Last Updated: 11 February 2015
Article by Simon Creek

The Court generally requires that the debts incurred by either or both of the parties should be paid from the property of the parties upon the breakdown of the relationship. However, the bankruptcy of one party affects how the debts are treated.

If your spouse or de facto partner becomes bankrupt, his or her property (except certain assets such as household goods, superannuation, some tools of trade and a motor vehicle up to a certain value) is immediately vested in the Trustee in bankruptcy.

You need to be aware of the introduction of the Bankruptcy and Family Law Legislation Amendment Act ("BFLAA") in 2005. Prior to the BFLAA, a non-bankrupt spouse could not make a property claim in the Family Court over property which had vested in a Trustee in bankruptcy. As a result, the Family Court struggled to resolve disputes between a non-bankrupt spouse and a Trustee in bankruptcy about a bankrupt's property.

The BFLAA now applies to bankruptcies after 18 September 2005. In a nutshell, the BFLAA gives the Family Court the power to make orders about property which has vested in a Trustee in bankruptcy. Specifically, the Family Court has the power to make the following orders:

  • Requiring property vested in the Trustee at the date of bankruptcy to be transferred to the non-bankrupt spouse;
  • Requiring a debt which is part of the bankruptcy to be paid from property which has not vested in the Trustee in bankruptcy; and
  • Requiring that the non-bankrupt spouse receive some or all of their entitlements in superannuation so that there is more non-exempt property available for the Trustee in bankruptcy.

The BFLAA also requires the Family Court to consider "the effect of any proposed order on the ability of a creditor of a party to recover the creditor's debt, so far as that effect is relevant." However, the interest of creditors is only one of many factors to be considered by the Court in determining the overall property division split between the non-bankrupt spouse and the Trustee. The interests of creditors are not given more or less weight than other factors.

In practical terms, what does this all mean for you as the non-bankrupt spouse? It means that the Family Court will exercise its wide discretion in balancing your competing claims as a non-bankrupt spouse over the property versus the competing interests of the creditors of the bankrupt spouse (or Trustee). Based on our analysis of the post-2005 case law, we have identified certain factors which may be relevant in how the Court will apply its discretion. In general terms, the factors are as follows:

  • Whether the proposed Orders to divide the property between the parties take into account the legitimate interests of the creditor;
  • Whether the Court should "ignore" a debt because the bankrupt spouse engaged in a course of conduct designed to reduce or minimise the effective value of matrimonial assets or acted recklessly or negligently with regards to matrimonial assets which had the effect of reducing their value. For example, whether the debts were incurred pre- or post-separation;
  • The overall financial circumstances of the non-bankrupt spouse and the children of the parties during the period after the debts were incurred and at the time of the property settlement proceedings. This includes the effect of the proposed orders on the non-bankrupt spouse and the parties' children;
  • Whether the non-bankrupt spouse knew of the events leading to the other spouse's bankruptcy. For example, the nature and degree of the non-bankrupt spouse's involvement in the business or investment activities of the bankrupt spouse. Another example is whether, and to what extent, the non-bankrupt spouse benefitted from or contributed to the bankrupt spouse's insolvency;
  • Whether the Family Court property settlement proceedings are part of a plan to insulate the family assets from creditors or to prevent creditors (or the Trustee on their behalf) from recovering their debts;
  • Whether the creditor knew or should have known of a claim or potential claim by the non-bankrupt spouse to the bankrupt spouse's property before or at the time that the debt was incurred;
  • Whether the creditor pursued their claim for payment of the debt prior to bankruptcy or prior to commencement of proceedings in the Family Court and whether the creditor did so in a timely fashion;
  • Whether the creditor (or Trustee), by words or conduct, led or permitted the non-bankrupt spouse to form a reasonable view that the debt would not be pursued and whether the non-bankrupt spouse was thereby induced (whilst acting in good faith) to change his/her financial position;
  • Whether either of the spouses has failed to make "full and frank disclosure" of their respective financial positions at all relevant times;
  • Whether the Trustee has failed to make "full and frank disclosure" of all relevant information as it relates to the identification and valuation of the property comprising the vested bankruptcy property and disclosure of all relevant information relating to provable debts.

The above factors are not exhaustive. If you are in situation where you are the non-bankrupt spouse in a family law proceeding, we recommend you seek legal advice as this is a complex area of law. You may contact our Family Law team at HHG who can provide advice tailored to your specific circumstances.

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.

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Simon Creek
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