The property interests of creditors and non-bankrupt spouses often conflict, and although legislative changes have been made to alleviate this tension complications still arise between these competing interests. It is extremely important for advisors (bankers, accountants, financial planners, etc) to understand how the Family Courts consider the non-bankrupt spouse’s entitlements in comparison to those of a creditor.

Trustee in Bankruptcy stands in the shoes of the bankrupt spouse

The Trustee in Bankruptcy has the right to seek to be joined as a party to any Family Law Act 1975 proceedings for property or spousal maintenance where one of the parties is bankrupt or subject to a personal insolvency agreement. If the Trustee seeks to be joined as a third party and the bankrupt’s creditors may be affected by the making of an Order, the Court must grant the Trustee’s application.

Once the Trustee in Bankruptcy is involved in the proceedings, they essentially stand in the shoes of the bankrupt spouse in the proceedings, with respect to all property that is controlled by the Trustee.

The Family Court’s role is to attempt to balance the competing interests of creditors with those of the non-bankrupt spouse in making property and/or maintenance Orders. For example, if a Court is making an Order regarding spousal maintenance, they are required to consider the effect of such an Order on the ability of a creditor to recover a debt. Under the legislation, the Family Courts have a wide discretion in balancing these competing interests.

The rights and risks of the non-bankrupt spouse

The Act gives judges the power to make a number of Orders in favor of the non-bankrupt spouse. For example, the Court can:
  • Order the Trustee in Bankruptcy to transfer property controlled by them, such as the parties’ family home, to the non-bankrupt spouse;
  • Restrain the Trustee in Bankruptcy from declaring or distributing any dividends among creditors, prior to the completion of the Family Law proceedings;
Clawing back assets is still a risk within the context of Family Law proceedings, as all property belonging to the bankrupt spouse up to 5 years before the date of bankruptcy, is at risk. Importantly, even if it is clawed back, the non-bankrupt can still claim an interest in the asset.
The prospects for a non-bankrupt spouse being successful in claiming property which is controlled by the Trustee to be transferred to them is increased by the following:
  • The ability of the non-bankrupt spouse to argue adjustments that generally relate to the future needs of the parties such as earnings of the parties, care of the children and health issues; and
  • The position of the bankrupt spouse and their willingness to cooperate with the Trustees to provide evidence of contributions. 

Right to set aside or vary a Family Court Order

Any person affected by an Order made under the Act in property settlement proceedings can apply to have that Order varied or set aside. Therefore, if an Order is made which prevents a third party (such as a creditor of the bankrupt spouse) from being able to recover a debt owing to them, they may make an Application seeking to have it set aside or varied.

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If your client or their former spouse is at risk of bankruptcy and they have not resolved their property settlement please contact one of our Family Lawyers to discuss how the Family Law Act would apply in the circumstances of their case.