Separation & Bankruptcy
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
- 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;
- 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.