Bankruptcy and Family Law – My Ex Becomes Bankrupt?

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Bankruptcy and Family Law: What Happens If My Ex Becomes Bankrupt?


If your ex becomes bankrupt, it is crucial to know how bankruptcy and family law intersect and what financial impact their bankruptcy will potentially have on you and your children.

With many Australians currently finding themselves out of work, the incidence of people declaring bankruptcy has increased dramatically and is expected to continue to rise.

The Family Law Courts can now make a property order even though the property has vested in the bankruptcy trustee of a party.


What is Bankruptcy?


Bankruptcy is a legal process whereby somebody is declared unable to pay their debts within a reasonable amount of time. It releases people from most of their outstanding debts and allows them to make a fresh start financially.

Under the Bankruptcy Act 1966, a person can declare bankruptcy one of two ways:

  1. A creditor or other person to who the person owes money makes an application to the Court who can then make the person bankrupt. This is known as involuntary bankruptcy.
  2. The person in question files a debtor’s petition, which has the effect of making the person bankrupt. This is known as voluntary bankruptcy.

Declaring bankruptcy means a Trustee will be appointed to take control of the person’s assets. These will then most likely be sold to pay off the person’s debts.

Certain assets, such as mortgages have specific rules that apply to them, while other assets are exempt altogether. These include:

  • Personal and ordinary household items
  • Tools that are required to carry out the person’s work (up to a specific value)
  • A person’s vehicle (up to a specific amount)
  • Trophies, medals and awards carrying sentimental value
  • Life insurance policies
  • Funds held in superannuation

If your ex is declared bankrupt and you are still in the process of getting a divorce, you may find that along with you and your ex being parties to the application, a trustee and creditors will now also be involved.


bankruptcy and family law



Bankruptcy and Family Law


The Bankruptcy act now gives the Family Court the right to deal with matters concerning property, spousal maintenance and child support where bankruptcy is involved.

In 2005 substantial amendments were made to the Family Law Act and the Bankruptcy Act 1966 to improve the process when this occurs.

The amendments understood the importance of the intersection between bankruptcy and family law.

In summary, the Family Law Courts can now make a property order even though the property has vested in the bankruptcy trustee of a party.

This is to cater for a number of different scenarios.

  1. The bankruptcy trustee may be joined as a party to proceedings in which a property order is sought and a party was bankrupt, or before completion of proceedings, a party becomes bankrupt; and
  2. The non-bankrupt spouse may request the bankruptcy trustee be restrained from distributing dividends from the matrimonial assets to creditors.

In the first scenario, the bankruptcy trustee may seek orders from the court to obtain assets that were disposed of prior to the bankruptcy, or during the bankruptcy.

The court will then a weigh up the competing interests between the non-bankrupt spouse and the bankruptcy trustee.

The steps undertaken by the court in ascertaining the parties, including third party’s interests, can now be summarised in the following 5 steps:

  1. Ascertaining the parties’ property by considering their legal and equitable interests in property and their liabilities.
  2. Determining whether it is just and equitable to make an order altering the parties’ “existing interests” both legal and equitable.
  3. If it is found just and equitable to alter the parties interest, assessing the parties’ financial and non-financial contributions.
  4. Ascertain if, after considering the above, it is necessary to make an adjustment for the future needs of the parties, taking into account matters set out in section 75(2).
  5. Finally, determining what orders it should make which will be just and equitable.



Trying To Defeat a Claim From A Creditor Or The Trustee


You may be tempted to enter into a financial agreements for the purpose of defeating a creditor or the bankruptcy trustee.

Be warned, the Family Law Act protects the trustee or creditor’s right to the vested interest in the bankrupt party’s property.

Accordingly, once a trustee is a party to Family Court proceedings with a vested interest in property, any financial agreement and the attempted allocation of property pursuant to that agreement can be disregarded completely.

You may be tempted to seek to finalise property settlement matters in the Family Court promptly and without the inclusion or knowledge of the creditor or trustee.

In the event that Orders have already been made allocating the bankrupt party’s existing interest in property to the non-bankrupt party, both a trustee or a creditor whose interest have been affected can bring an application under section 79A(4)and(5) to set aside or vary those orders.

This would include but not limited to the potential transfer or sale of the former matrimonial home.



Proceedings in Family Court


Upon a bankruptcy trustee becoming a party, the bankrupt party is not entitled to make a submission to the Court in connection with any vested bankruptcy property.

If your ex is bankrupt or becomes bankrupt during your divorce proceedings, they must notify the Court at the start of the proceedings or as soon as they become insolvent.

If it is the case that your ex is bankrupt, but you are not, you have the right to make an application to the Court for an injunction concerning any assets and property in which you have a shared interest.

The purpose of such an injunction is to ensure the appointed trustee cannot distribute any assets and property before the property matter has been settled in Court.

In some cases, this may mean you can continue to stay in your house after separation, depending on what the Court determines.


Bankruptcy and Child Support


If your ex has declared bankruptcy, they are still required to pay child support and spousal maintenance.

If your ex cannot, or does not, pay the amount stipulated in the child support or spousal order, you can apply to the Court to enforce the payments.

The money can be recovered by voluntary payments, by deductions from your ex’s wages or by intercepting taxation refunds.


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