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      The Interaction of Bankruptcy and Family Law

      The Interaction of Bankruptcy and Family Law

      The Interaction of Bankruptcy and Family Law 1024 619 Dorter

      It may come as a surprise that bankruptcy issues can be intertwined in your property settlement dispute arising out of the breakdown of your marriage or de facto relationship. This is because section 35 of the Bankruptcy Act 1966 (Cth) (“BA Act”) confers jurisdiction in bankruptcy on the Federal Circuit and Family Court of Australia.

      You are considered bankrupt if a sequestration order has been made against your estate or as a result of a debtor’s petition. A bankruptcy trustee is the person who administers the bankrupt person’s estate, the bankrupt’s property having vested immediately in the trustee.

      The bankruptcy trustee is required to:

      1. Sell all of the vested property and distribute the proceeds amongst creditors (being the person(s) to whom money is owed) and return any surplus to the bankrupt; or
      2. Sell enough property to pay the creditors debt.

      Part VIIIAA of the Family Law Act 1975 (Cth) (“the Act”) provides protection for creditors of parties to a marriage or de facto relationship. As a result, a bankruptcy trustee has the ability to partake in property settlement proceedings ‘as a respondent standing in the shoes of a bankrupt’.[1]

      If I am bankrupt, can I commence family law proceedings against my former spouse?

      If you are declared bankrupt, you still have the right to commence property settlement proceedings against your former spouse. However, you must keep in mind that the bankruptcy trustee has the right to be joined as a party to the proceedings. This means that whether you commence proceedings as a bankrupt, or you become bankrupt in the midst of your property settlement proceedings, you have an obligation to notify the Court, all other parties, and the bankruptcy trustee.

      Notice to the Trustee

      Once notice has been given, the bankruptcy trustee may file an application to become a party to the proceedings. If this occurs, pursuant to section 79 (12) of the Act, the bankrupt party is not permitted to make any further submission to the court in relation to any property vested with the bankrupt without leave (permission) of the court. The Court will only grant leave if exceptional circumstances apply.

      What happens if I am declared bankrupt after I commence property settlement proceedings?

      If you are declared bankrupt while property proceedings are on foot, the proceedings will be stayed in accordance with section 60 of the BA Act until the bankruptcy trustee elects to continue the proceedings. If no election is made by the bankruptcy trustee, the non-bankrupt partner may be able to continue the proceedings or seek to proceed on an undefended basis.

      Standing of the bankrupt party

      In the matter of Warin & Warin (No 4) [2022] FedCFamC1F 160, the bankrupt party had no standing in relation to any of the property vested in the trustees in bankruptcy. The bankrupt party did, however, have standing in relation to the non-vested assets including his interests in the parties self-managed superannuation fund. This is because some property, including most superannuation, is classified as exempt property and does not vest in the bankruptcy.

      If my former spouse or de facto partner has been declared bankrupt, can I commence family law proceedings?

      If your former spouse or de facto partner has been declared bankrupt, you may apply to the Court and seek an injunctive order restraining the bankruptcy trustee from declaring or distributing vested property amongst creditors. Before doing so, it is important to weigh up the competing claims, namely the status of the claim by the bankrupt’s creditors against the evidence of your claimed interest.

      The Courts have accepted that a trustee in bankruptcy may hold matrimonial property on trust for the non-bankrupt spouse due to ‘…the special nature of beneficial ownership of property as between spouses irrespective of the fact that the legal title to the property may stand in one party’s sole name.’[2] The interest in property claimed by a non-bankrupt spouse is generally seen, however, to not have the same status against secured creditors.

      Secured creditors vs non-secured creditors

      In the matter of Gazi & Strobel [2021] FedCFamC 223, Mr Gazi commenced property settlement proceedings against his former partner who was an undischarged bankrupt, represented by the bankruptcy trustee. The parties had been in a de facto relationship for nine years and had three children together. The debt against the bankrupt partner was secured in the sum of $40,798.09.

      The Court considered the rights of the non-bankrupt partner and found that his interest did not have the same status of a ‘secured creditor’. The Court ordered the bankruptcy trustee to pay the secured creditor from funds held in trust for the bankrupt estate on an interim basis for the matter was finally determined.

      Seeking Advice in Australia

      The impact on bankruptcy in family law matters can be extremely complex. Our firm is well-versed in the area of bankruptcy. If you, or your former partner is bankrupt and you are in the stages of separation, you can contact us at Dorter Family Lawyers & Mediators for legal advice.