During property settlement proceedings, a spouse may declare bankruptcy (the Bankrupt) and become a ‘penniless partner’. This situation may impact the non-bankrupt spouse (the Spouse), giving rise to the risk of the Spouse’s claim being defeated in the proceedings. To prevent this outcome from occurring, the Spouse can apply to effectively cancel the Bankrupt’s bankruptcy based on the reason that the bankrupt had attempted to undermine the property settlement proceedings.  

When a penniless partner is involved in divorce proceedings, the Federal Circuit and Family Court has power to decide which assets are available to the Bankrupt’s creditors. Usually, all the Bankrupt’s property, excluding some exempt property, can be taken and sold to pay the people the Bankrupt owes money to (creditors). Items may include household property, personal property, and vehicles.

When parties separate and one party is bankrupt, competing claims between the Spouse and the Bankrupt’s creditors will arise. The Court will balance the competing claims and make adjustments to the property split accordingly. An example of a Court order can include the Court requiring a specific property to be transferred out of the Bankrupt’s estate to the Spouse. The Court can also order the trustee of the Bankrupt’s estate not to distribute the estate for a limited time period.

When considering property settlement, the Court is required to make a just and equitable order. Courts will consider whether the settlement order may impact the creditors’ ability to recover from the Bankrupt. Given these considerations, the Court will look at the Spouse’s and the Bankrupt’s claims equally, and this may result in either party being disadvantaged by the result.

Property settlement proceedings often have a significant impact on a non-bankrupt spouse or partner. If you are facing property settlement in a situation where one of the parties has become or is likely to become bankrupt, the Family Law team at Craddock Murray Neumann Lawyers can provide legal advice.