Bankruptcy can be a difficult and stressful time in life and many questions in relation to family law arise during this time. The cross over between family law and bankruptcy is difficult and complicated and legal advice is important in these matters.
What is the effect of bankruptcy in Family Law?
Once a party to the marriage or de facto relationship has declared/been declared bankrupt, his/her property immediately becomes vested in the Trustee. Excluding some assets such as; household goods, superannuation, trade tools and vehicles up to a specified value.
This does not include the family home, as it is not a protected asset under the Bankruptcy Act 1966. If there is equity in the home after mortgage and selling costs the Trustee will obtain the property.
This results in the bankrupt party no longer having interests in their property, which in turn may affect the property pool in a property settlement.
Can we mediate if a Party is Bankrupt?
No, pre-action procedures such as mediation as per the Family Law Rules 2004 do not apply where one party to the marriage or de facto relationship has been declared/declared bankrupt.
Can the court order the transfer of property vested in the trustee?
Once a trustee is a party to the Family Court proceedings, any financial agreements’ or attempts of allocation of property pursuant to that agreement is completely disregarded.
If I declare bankruptcy I won’t have to go through a property settlement
This is a common misconception about declaring bankruptcy in relation to family law matters.
If you are declaring bankruptcy in order to avoid property settlement, paying spousal maintenance or child support, you will need to reconsider and seek legal advice. An obligation to pay child support will trump the obligation to pay creditors.
Even when a party has declared bankruptcy, spousal maintenance and child support orders may still be made against the bankrupt party. The non-bankrupt party can enforce these debts and payments via court proceedings and be recovered by deductions of the bankrupt persons’ wages, or by applying for taxation refunds as per the Bankruptcy Act 1966.
The Court must be notified at the beginning (or during the case) if a party is (or becomes) bankrupt.
A trustee must be given notice when the party becomes or is a party to a family law financial or property settlement proceeding.
The court will consider the interests of the parties, the trustee and creditors in relation to whether or not it should make orders to alter the parties existing interests. Before the making of orders, the court will consider;
- The existing interests in the property,
- The likely impacts of the proposed orders on the creditor’s rights,
- Whether the party’s conduct has been to knowingly reduce, or minimise the value or worth of the assets,
- Whether the party’s conduct has acted recklessly or negligently to the effect which has in turn reduced or minimised the value of the property.