Separating from a partner can be a stressful time, particularly when there are concerns about how assets, debts and financial resources will be divided. When one party is bankrupt, a family law property settlement can become significantly more complex because the interests of the bankrupt person, their former partner and their creditors may all need to be considered.
If you or your partner are facing bankruptcy or insolvency issues, it is important to obtain legal advice as early as possible. Taking steps before assets are dealt with can help protect your interests and ensure you understand your rights and obligations.
This article explains how bankruptcy affects family law property settlements, including what happens to assets, the role of a trustee in bankruptcy and how the Court balances the rights of creditors with the interests of a spouse or former partner.
What Happens When a Person Becomes Bankrupt?
A person becomes bankrupt when they are unable to pay their debts and enter into bankruptcy under the Bankruptcy Act 1966 (Cth).
When a person becomes bankrupt, control of certain financial affairs is transferred to a trustee in bankruptcy. The trustee is responsible for administering the bankruptcy and may deal with certain assets to satisfy claims made by creditors.
However, not all property is available to creditors. Certain assets may be protected under bankruptcy laws, including:
- ordinary household items and personal possessions;
- certain tools of trade;
- a motor vehicle up to the prescribed value limit;
- certain compensation payments; and
- superannuation in most circumstances.
How Is Property Divided After Separation?
When a relationship breaks down, separating couples may need to divide their property interests. This process is commonly referred to as a property settlement.
The Court generally follows a four-step approach when determining how property should be divided:
- Identify and value the property pool, including assets, liabilities and financial resources.
- Assess each party’s contributions, including financial contributions, non-financial contributions and contributions made as a homemaker or parent.
- Consider each party’s future needs, including factors such as age, health, income earning capacity and caring responsibilities.
- Determine whether the proposed division is just and equitable in all the circumstances.
For more information about dividing assets after separation, see our guide to property settlements.
The Federal Circuit and Family Court of Australia deals with applications relating to property and financial matters after separation.
What Happens When One Party to a Property Settlement Is Bankrupt?
When a relationship breaks down and one party is bankrupt, both the Bankruptcy Act 1966 (Cth) and the Family Law Act 1975 (Cth) may apply.
Bankruptcy does not prevent a person from seeking a family law property settlement. However, the bankruptcy may affect how property is dealt with and may require the involvement of the trustee in bankruptcy.
The Family Law Act 1975 allows the Court to adjust property interests after separation, including in circumstances where property may have vested in a trustee in bankruptcy.
This means the Court can consider the interests of the non-bankrupt spouse or partner while also taking into account the rights of creditors.
Importantly, the legal ownership of an asset is not always the only factor considered. The Court may examine the contributions made by each party and the circumstances surrounding ownership of the property.
What Happens to the Family Home?
The family home is often one of the most significant assets considered during a property settlement.
A bankrupt person’s interest in a family home may become available to the trustee in bankruptcy to satisfy creditor claims. However, the circumstances of each matter must be considered carefully.
For example, where a property is registered only in the bankrupt person’s name, the Court may still consider whether the non-bankrupt spouse or partner has an interest in the property based on their financial or non-financial contributions.
This means that ownership on title does not necessarily determine the final outcome of a family law property settlement.
The Role of a Trustee in Bankruptcy in Family Law Proceedings
A trustee in bankruptcy may become involved in family law proceedings where the bankrupt person’s assets are relevant to the property settlement.
The trustee’s role is generally to protect the interests of creditors and ensure that assets available under bankruptcy laws are properly dealt with.
Depending on the circumstances, a trustee may:
- seek to participate in family law proceedings;
- object to proposed property settlement orders;
- seek recovery of assets that should be available to creditors; or
- investigate whether assets have been transferred to avoid creditor claims.
Affected creditors may also have rights in relation to certain family law property orders and may seek to challenge arrangements in appropriate circumstances.
How Does the Court Balance Creditors’ Rights and the Non-Bankrupt Partner’s Interests?
When determining a property settlement involving a bankrupt party, the Court must balance competing interests.
The Court may consider factors including:
- the non-bankrupt partner’s financial and non-financial contributions;
- the effect of the proposed orders on both parties;
- future needs, including employment circumstances, health and caring responsibilities; and
- the impact of the orders on creditors and whether debts can be repaid.
The outcome will depend on the individual circumstances, including the timing of the bankruptcy, the assets involved and the contributions made during the relationship.
Can a Property Settlement Proceed If One Partner Is Bankrupt?
Yes. A property settlement can still proceed if one party is bankrupt, but additional issues may need to be addressed.
Depending on the circumstances, proceedings may involve:
- the bankrupt person;
- the non-bankrupt spouse or partner; and
- the trustee in bankruptcy.
The Court may need to determine whether certain assets should remain available to creditors, whether the non-bankrupt party has an interest in particular property and whether the proposed outcome is just and equitable.
Key Takeaways
- Bankruptcy can significantly affect a family law property settlement.
- Certain assets of a bankrupt person may become available to a trustee in bankruptcy.
- A spouse or former partner can still pursue a property settlement despite bankruptcy.
- The trustee in bankruptcy may need to participate in family law proceedings.
- Early legal advice can help protect your interests and clarify your options.
Legal Advice About Bankruptcy and Property Settlements
Bankruptcy and family law property settlements are complex areas that require careful consideration of financial circumstances, creditor interests and the rights of both parties.
If you or your partner are facing bankruptcy, insolvency issues or separation, our experienced family lawyers can provide advice about your options and help you understand the next steps.
To discuss your circumstances, please contact our team.
This article provides general information only and is not intended to be legal advice. You should obtain advice specific to your circumstances.