Separation can become more complicated when one person is bankrupt or facing bankruptcy. A bankruptcy and property settlement matter may involve more than deciding how assets and liabilities should be dealt with between former partners. The rights of a trustee in bankruptcy and the effect of existing property orders may also need to be considered.

Bankruptcy does not automatically bring a family law property settlement to an end. However, it can affect who controls certain property, who may participate in proceedings and how existing or proposed property arrangements operate.

The outcome can depend on the timing of the bankruptcy, the nature of the property and what has already occurred in the family law proceedings.

Why Can Bankruptcy Complicate a Property Settlement?

When a person becomes bankrupt, certain property may vest in the trustee in bankruptcy. This means the bankrupt person no longer has the same ability to possess, control or deal with that property. Some categories of property are exempt from vesting.

Bankruptcy can therefore introduce interests beyond those of the former partners into a family law property dispute. The trustee administers the bankrupt estate for creditors, while the interests of the non-bankrupt party may also need to be considered.

As a result, assumptions about who owns, controls or can transfer an asset may need to be reconsidered.

Does Bankruptcy Stop a Family Law Property Settlement?

Not necessarily! Property proceedings are not precluded merely because unsecured liabilities exceed the separated couple’s assets.

The Federal Circuit and Family Court of Australia can deal with matters connected with bankruptcy in property and financial proceedings. This jurisdiction is conferred by section 35 of the Bankruptcy Act 1968 (Cth). The Family Law Act 1975 (Cth) also allows the Court, in relevant property settlement proceedings, to alter the interests of a bankruptcy trustee in vested bankruptcy property.

Importantly, the non-bankrupt former partner does not automatically have priority over creditors, nor do creditors automatically have priority over the non-bankrupt party. The competing interests need to be determined within the applicable legal framework.

What Happens to Property When One Person Becomes Bankrupt?

Property belonging to a person when bankruptcy begins, and certain property acquired during bankruptcy, may vest in the trustee. However, not every asset is treated in the same way, with bankruptcy law providing exemptions for certain property.

In a family law matter, it may therefore be necessary to identify the nature of each asset, how it is owned and whether another person has an existing legal or equitable interest.

Why Can the Timing of Bankruptcy and Property Orders Matter?

Timing can be particularly important where bankruptcy and property settlement overlap.

If property orders were made before bankruptcy, their terms and legal effect may need to be examined to determine what interests existed when the bankruptcy took effect. If bankruptcy occurs while property proceedings remain underway, the trustee may become relevant to how the case continues.

The issue is therefore not simply whether bankruptcy happened before or after separation. The timing of bankruptcy, Court orders and relevant property dealings can affect the legal position and should be considered together.

Can a Trustee in Bankruptcy Become Involved in the Family Law Case?

A bankruptcy trustee may apply to become a party to property settlement proceedings. If the applicable statutory requirements are satisfied, including that the interests of the bankrupt person’s creditors may be affected, the Court must join the trustee as a party.

Where the trustee becomes a party, the bankrupt person generally cannot make submissions about vested bankruptcy property without the Court’s permission. Parties to financial or property proceedings must also notify the Court if they are or become bankrupt.

This means bankruptcy can materially change who participates in a property dispute and how issues concerning particular assets are addressed.

What If Property Orders Have Already Been Made?

Existing property orders should not be disregarded simply because bankruptcy occurs later.

Their wording, timing and legal effect may be important in determining what property interests existed when bankruptcy took effect. The Family Law Act also provides circumstances in which a person affected by property settlement orders may seek to have them set aside or varied. A bankruptcy trustee can be among those able to make such an application.

Why Early Legal Advice Can Matter

Bankruptcy can affect decisions about property transfers, negotiations, Court proceedings and existing orders. Early advice can help identify what property may have vested in a trustee, whether the trustee may need to participate and whether previous orders or transactions require closer examination.

Depending on the circumstances, family law advice may also need to be coordinated with advice from an insolvency practitioner, accountant or other specialist.

How Shan Lawyers Can Assist

Shan Lawyers assists clients across Melbourne and Victoria with complex property settlements, including matters where bankruptcy, creditors or third-party interests affect the financial issues in dispute.

We can help identify the family law implications, consider the effect of existing or proposed property orders and advise on the steps required as the matter progresses.

If bankruptcy is affecting your property settlement, contact Shan Lawyers for advice about how it may interact with your family law matter.

About the Author

Thirumalai Selvi Shanmugam is the founder, Director, and Principal lawyer at Shan Lawyers and is a leading family law specialist in Australia whose expertise is often sought by organisations and the media.

Disclaimer

This article provides general information only and does not constitute legal advice. Family law matters are fact-specific, and available options depend on the circumstances of each case.

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