Dividing property after separation is often stressful. Each party worries about their financial future. Bankruptcy adds further complexity to a family law property settlement.
Even couples who are still together should seek urgent legal advice if one party faces bankruptcy or insolvency. The non-bankrupt party should act quickly to protect their interests in shared assets.
This article explains bankruptcy law, how property is divided after separation, and how both systems interact when bankruptcy occurs. This is general information only. You should seek advice for your specific situation.
What happens when a person becomes bankrupt?
A person becomes bankrupt when they cannot pay their debts. A trustee in bankruptcy is appointed to manage their financial affairs. The trustee takes control of most assets and uses them to pay creditors.
Some assets are protected. These may include clothing, basic personal items, tools of trade, a car up to a set value, compensation payments, superannuation, and life insurance policies.
The trustee manages the bankrupt person’s financial affairs during the bankruptcy period.
How is property divided after separation?
Property division follows a four-step process:
- Identify the asset pool
- Assess financial and non-financial contributions
- Consider future needs
- Decide a just and equitable split
What happens when one party is bankrupt?
Bankruptcy and family law overlap when one party becomes bankrupt. The Bankruptcy Act 1966 and the Family Law Act 1975 both apply.
The Family Law Act allows a Court to adjust property interests after separation. This includes property held by a bankruptcy trustee.
The Court can protect the non-bankrupt party’s interest, even if legal title sits with the trustee. In some cases, ownership matters less than fairness.
The family home may also be affected. A trustee can claim the bankrupt’s share to pay creditors. However, the Court may recognise a shared interest between partners.
Creditors or trustees can challenge court orders in some situations. A trustee may also join proceedings to protect creditor interests.
The Court balances the rights of creditors and the non-bankrupt partner. It aims to reach a just and equitable outcome.
The Court considers several factors, including:
- Financial and non-financial contributions
- Impact of orders on each party
- Future needs, including children and health
- Impact on creditors and debt recovery
Some assets that would normally go to creditors may instead be adjusted in favour of the non-bankrupt partner.
Key takeaways
- The trustee controls the bankrupt person’s assets for creditors
- A former partner can still seek a family law property settlement
- Cases usually involve the non-bankrupt party and the trustee
- The Court may:
- Restrict the trustee’s dealings with certain assets
- Adjust asset distribution in favour of the non-bankrupt party
- Consider whether assets should be available to creditors
Conclusion
If bankruptcy is involved, legal advice is essential. This applies whether your relationship has ended or is still ongoing.
If you need advice, contact us on (03) 9422 5439 or email [email protected].