If one party to a marriage becomes bankrupt: What happens to the property interests?

Date: Dec 01, 2012
Document Type: Newsletter

When bankruptcy and family law collide, the results are how shall we say it? Difficult. Under s 58 of the Bankruptcy Act 1966 (Cth), once a person becomes bankrupt, that person’s divisible property vests in the trustee. However, under s 116 of the Bankruptcy Act, certain property such as superannuation, tools of the trade, some furniture, and transport can be exempt, but the fact still remains, that the interaction between bankruptcy and family law is extremely complicated.

How can bankruptcy affect the property of a spouse?

With the introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth)(the Amendment) afforded non-bankrupt spouses greater protections in property proceedings with the insertion of the s 59A provisions into the Bankruptcy Act. The provisions provides that ss 58 and 59, being the vesting sections, are subject to orders made under Pt VIII of the Family Law Act 1975 (the FLA). So what does that exactly mean? Well, what it essentially signifies is that the income of the bankrupt does not vest in the trustee, therefore, allowing a non-bankrupt spouse the ability to seek maintenance from a bankrupt spouse.

The Amendment gave a non-bankrupt spouse the right to share property of a bankrupt spouse, and if we look to s 4(1) of the FLA under the definition of “matrimonial cause” at paragraph (cb), reference is made to proceedings between:

  • a party to a marriage; and
  • the bankruptcy trustee of a bankrupt party to the marriage.

Trustees can join a party to family law proceedings if the court is satisfied that any interest of the creditors of a bankrupt will be affected in a property proceeding, as outlined in s 79(11) of the FLA. What we should highlight is if proceedings are on foot which includes a creditor and non-bankrupt spouse, neither party has greater priority over the other under s 79 of the FLA. In Billtoff and Billtoff (1995) FLC 92-614, the Full Court of the Family Court of Australia at Perth said:

“Although, there is a general rule, it is not absolute, is not prescribed by statute and there are a number of well recognised exceptions. There is no requirement of that the rights of an unsecured creditor or a claim by a third party must be considered and dealt with prior to the Court making an order under sec 79, nor is there a rule of priority as between a creditor claimant and a spouse. Those rights, however, cannot be ignored. They must be recognised, taken into account and balanced against the rights of the spouse.”

Under the provisions of s 79(12) of the FLA, there will be certain circumstances where a trustee in bankruptcy must be joined to the proceedings, and the bankrupt needs to obtain leave in order to make submissions if the trustee is a party.

This article is only a brief overview of how bankruptcy and family law interact with one another. Needless to say the area is extremely complex and if you have a matter that involves bankruptcy and family law, please seek the assistance of a lawyer who will be able to help.

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