Bankruptcy and Family Law

We have recently had an increase in family law clients coming to us for advice in cases where their former spouse has been declared bankrupt. A common misconception is that if a spouse/partner is bankrupt[1], the other has no recourse in the family law jurisdiction.

The good news is: bankruptcy does not prevent the non-bankrupt spouse in such circumstances from pursuing an adjustment to property interests under the Family Law Act.

The Family Court has comprehensive powers to deal with proceedings for property settlement and spousal maintenance in circumstances where a bankruptcy trustee^[2] has been appointed, and property of the bankrupt spouse/partner has been vested in the trustee under the Bankruptcy Act 1966. Family courts have sweeping powers to interfere with the interests and rights of third parties, including Trustees and creditors in the context of bankruptcy.

The Bankruptcy and Family Law Legislation Amendment Act 2005 (“BFLAA”) provides the non-bankrupt spouse with protection of his/her interest in matrimonial or jointly owned property and even the opportunity to obtain a share in the bankrupt spouse’s vested assets for the benefit of the non-bankrupt and his/her dependents.

Moreover, it is not a prerequisite of the proceedings that the spouses be separated with the amendments applying whether the marriage is intact or not^[3].

This is by no means to suggest that pursuing family law matters in the context of bankruptcy is an easy task.

Unfortunately, if somebody has been declared bankrupt, it is extremely likely that his/her spouse may need to commence legal proceedings in Court to protect his/her, interest in matrimonial assets. Once a bankruptcy order has been made – whether voluntary or forced – the bankrupt’s financial affairs effectively become managed by the Trustee and the other spouse’s ability to negotiate with the bankrupt directly is very limited.

Every case is different and in a limited number of matters it may be that a Trustee administering the bankrupt’s estate has some power and willingness to reach a negotiated settlement that is advantageous to his/her spouse.

Most commonly, however, it will be necessary to commence proceedings in the Federal Circuit Court or the Family Court.

The family courts have the power under section 79 of the Family Law Act to adjust property interests between the spouses whatever the legal title might say about an asset or liability, the Court can interfere and reapportion this.

The most common example is regarding the matrimonial home. Even in circumstances where the registered title to the property is in the bankrupt’s name, the Court may conclude that it is a joint matrimonial property and the non-bankrupt’s interest in the property must be protected from the bankruptcy. The Court has the power to make various possible orders, for example, to require the property’s sale and the distribution of proceeds to one or the other spouse.

In making any order adjusting property interests, the Court considers several factors under section 79 (4) Family Law Act, including the contributions (financial and non-financial) each spouse made to the relationship and the future needs of the non-bankrupt (whether that spouse is caring for children, what is his/her employment status and prospects, health and so on).

A bankruptcy does not mean that the non-bankrupt spouse is without recourse in the family law jurisdiction. However, careful consideration needs to be given to each case and it is important to act quickly to ensure that the Trustee administering the bankrupt’s estate does not start disposing of matrimonial assets.

If you would like to discuss your matter involving bankruptcy or any other family law matter, you may contact one of our solicitors experienced in these types of matters or any other of our experienced family law team.