Bankruptcy and Family Law

The Bankruptcy and Family Law Legislation Amendment Act 2005 came into effect in September 2005.  This legislation aims to provide greater certainty in cases involving family law and bankruptcy. 

The Family Court now has jurisdiction to make orders for child support, spousal maintenance or property settlement in favour of a non-bankrupt spouse against the trustee of bankruptcy of their bankrupt spouse.  Any property that a trustee in bankruptcy is ordered to transfer to the bankrupts spouse is property which is exempt from the reach of other creditors.

A trustee in bankruptcy must be joined to the proceedings if the Court is satisfied that the interests of the bankrupts creditors may be affected by the making of an order.  When a trustee is joined to the proceedings, the bankrupt is not entitled to make submissions to the Court about the property vested in the trustee, except in exceptional circumstances.

The legislation allows vested bankruptcy property to be transferred to the non-bankrupt spouse either by way of property settlement or lump sum maintenance. Of course, not all assets of a bankrupt will vest in the trustee.  Superannuation (up to a certain limit) and property held in trust does not vest in the trustee.  These assets and interests are therefore claimable by the non-bankrupt spouse, in the ordinary course.

There remains uncertainty about how the competing claims of non-bankrupt spouses and other creditors in the bankruptcy will be reconciled.  Before the Court makes an order transferring property vested in the trustee to the non-bankruptc spouse, the Court must have regard to the effect, if any, of the proposed order on the ability of a creditor to recover their debt.  The job of the trustee is to defend vested bankruptcy property from claims by the non-bankrupt spouse, as it were the bankrupt spouse.

Bankruptcy can occur prior to separation or after separation; prior to property settlement negotiations; during or after property settlement negotiations.  The Bankruptcy and Family Law Legislation Amendment Act 2005 has elevated the needs and interests of spouses and their children so as to stand, at least, side-by-side with the needs and interests of creditors.  It should be remembered, however, that this new legislation works not in lieu of, but alongside, the anti-avoidance and claw-back provisions of the Bankruptcy Act.

Joelene Aafjes