Bankruptcy and Family Law

The general principle in family law is that the debts incurred by one of both of the parties to a relationship should be included in the overall asset and liability pool at time of separation.

However, if you are involved in circumstances where either you or your partner are facing bankruptcy, we recommend you obtain legal advice to best protect your financial interests. If you or your partner declares bankruptcy, your assets and distribution thereof then become subject to the appointed Trustee’s discretion.

The Family Court now has power to make orders even in circumstances where one party has declared bankruptcy, however, the Family Court must consider the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt, so far as that effect is relevant.

For example, the Family Court now has the following powers:
1.    They could order that the Trustee transfer property to the non-bankrupt spouse
2.    Order which debt(s) are to be paid from property that is not held by the Trustee
3.    Make an order that the non bankrupt party receive a portion of (or all of) their superannuation entitlement
The Court has to consider a myriad of factors when examining the property pool and considering the bankrupt party’s circumstances. These factors include consideration of the four step process (see our article on the four step process). The Court may also consider factors including but not limited to:
–    Whether the bankrupt party intentionally tried to reduce or minimise the value of the asset pool
–    Whether the bankrupt party acted recklessly or negligently and subsequently diminished the asset pool as a result of those actions
–    The effect of orders on the non bankrupt party and any children of the relationship
–    The extent to which the non bankrupt party was aware of the events that led to the other party declaring bankruptcy
–    When the creditor(s) commenced pursuing the debt against the bankrupt party (i.e was it during the relationship or prior to proceedings being commenced in the Family Court)

Dealing with a bankrupt party can have its complications but we encourage you to contact our firm to find out how you can best protect yourself and ensure you have proper advice prior to signing over any assets or paying any debts of the relationship as directed by a Trustee.

If you have any questions, please do not hesitate to contact us.

This blog does not constitute legal advice and Claire Naidu & Co is not responsible for any reliance upon its contents in the absence of legal advice being provided to you in conference or in writing concerning your specific circumstances.