Marital property if one spouse becomes bankrupt

When bankruptcy and family law collide, the results are how shall we say it? Complex.

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.

How does this affect the property of the non-bankrupt spouse?

With the introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) (the Amendment) this afforded non-bankrupt spouses greater protections in property proceedings. The Amendment inserted 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).

What does that exactly mean?

It essentially signifies 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.

Joining the proceedings

Trustees can be joined as 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.

We’re Here to Help

The intersection of bankruptcy law and family law can be copmplicated. If you require any assistance with a family law dispute, always contact a legal practitioner who will be able to help.

O’Sullivan Davies has practitioners experienced both in conducting matters acting for the Trustee in Bankruptcy and the non bankrupt spouse. More information about our services can be found at our About Us page here.

Disclaimer

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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