This article on bankruptcy and family law discusses how bankruptcy affects a family law matter.
Bankruptcy is the legal declaration that a person is unable to pay their debts within a reasonable time. When a person is declared bankrupt, nearly all of their assets are placed with a bankruptcy trustee and then sold to pay the person’s debts.
In a family law matter, bankruptcy can occur at any of the following key events:
- negotiating a property settlement;
- documenting a settlement;
- having orders made under the Family Law Act 1975;
- implementing those orders;
- death; or
- subsequent bankruptcy.
The consequences of bankruptcy in a family law matter are significant and cannot be ignored.
This is particularly so in circumstances when the Australian Taxation Office may take legal action to recover outstanding tax and superannuation debts (depending on whether the debt is owed by an individual (or sole trader), partnership, trust, superannuation fund or company which may include any of the following:
In short, the Family Law Courts can now make a property order even though property has vested in the bankruptcy trustee of a party, altering the interests of the trustee in the vested bankruptcy property.
The bankruptcy trustee may be joined as a party to proceedings in which a property order is sought and a party was a bankrupt, or before completion of proceedings, a party becomes a bankrupt. The bankruptcy trustee may also, upon the application of the non-bankrupt spouse, be restrained from distributing dividends among creditors. Upon a bankruptcy trustee becoming a party, the bankrupt party is not entitled to make a submission to the Court in connection with any vested bankruptcy property.
Most importantly, the 4-step property settlement process still applies where a spouse is or becomes a bankrupt during the proceedings. This would include but not limited to the potential transfer or sale of the former matrimonial home (which, contrary to popular belief, is not “a protected asset” under the Bankruptcy Act 1966).
Spousal maintenance may also be a “live issue,” such that the liability of a bankrupt party to maintain the other spouse party may be satisfied, in whole or in part, by way of transfer of vested bankruptcy property in relation to the bankrupt party.