If you are going through a separation and you or your partner are or become bankrupt, it is important to know how it can affect the way a Court will deal with property division.

Once a person becomes bankrupt, their property is immediately vested in the Trustee in bankruptcy. The bankruptcy trustee may then be joined as a party to the proceedings in which a property order is sought.

Through the introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (“BFLAA”), the Family Court has the power to make orders in relation to property which is vested in a Trustee in bankruptcy. Specifically, the Family Court can make the following orders:

• That the property vested in the Trustee in bankruptcy be transferred to the non-bankrupt spouse.
• That a debt be paid from property not yet vested in the Trustee in bankruptcy.
• That the non-bankrupt spouse receive their entitlements in superannuation.

The BFFLA also requires the Family Court to consider the effect of any proposed order on the creditor’s ability to recover a debt when making family law property orders. However, this is only one of several factors the court considers when determining property division and the interests of creditors are not given greater or less weight than other factors.

Therefore, the Family Court can exercise a wide discretion in balancing the claim of a non-bankrupt spouse against the competing interests of the creditors of the bankrupt spouse. This is an important factor to keep in mind when trying to protect the interests of a party to a marriage who has a bankrupt husband or wife and who is being pressed by the trustee in bankruptcy.

If you have any queries in relation to bankruptcy in family law proceedings, please contact our Family Law team at wmd@wmdlaw.com.au or on 9525 8688.