In this entry we dive into the issue of bankruptcy and family law.
As part of its economic response to the coronavirus pandemic, the Australian Government has made temporary changes to Bankruptcy law. These changes were originally intended to be active for six months from 25 March 2020.
Despite this welcome relaxation, Australians are bracing for a lengthy economic recovery, perhaps going beyond the initial September deadline. After all, our household finances have been impacted to a degree that has not been experienced for decades.
Many are facing partial or total loss of income, falling house prices and job insecurity regardless of industry. For those struggling with mounting debt, the prospect of declaring bankruptcy is all too real.
So what happens then when bankruptcy and family law issues collide?
What is bankruptcy?
Bankruptcy is a formal legal process, whereby a person is declared unable to pay their debts. This process is administered pursuant to the Bankruptcy Act 1966 (Cth).
A person may be declared “bankrupt”: where:
- that person enters into bankruptcy (voluntary bankruptcy); or
- a creditor, or person to whom money is owed, makes a “creditor’s petition” against that person, which has the effect of making that person bankrupt (involuntary bankruptcy).
Upon bankruptcy, the Australian Financial Security Authority appoints a bankruptcy trustee to manage the bankrupt estate and any payments to creditors that are able to be repaid.
Bankruptcy and the Family Law Act
Pursuant to the Family Law Act 1975 (Cth), the Family Court of Western Australia can deal with any matter connected with or arising out of the bankruptcy of a party to a marriage in proceedings for:
- property settlement under Section 79;
- setting aside property orders under Section 79A;
- spousal maintenance under Section 74; and/or
- enforcement of any of the above orders.
The Family Law Act 1975 (Cth) provides for the involvement of a bankruptcy trustee in family law litigation between parties to a marriage, to the extent that the litigation involves property vested in the bankruptcy trustee.
Which property vests in the bankruptcy trustee?
Upon declaration of bankruptcy, the bankrupt’s rights in property immediately vest in the bankruptcy trustee – meaning that the bankruptcy trustee has the right to possess and control that property, including the right to sell it.
Pursuant to Section 5 of the Bankruptcy Act 1966 (Cth), “property” captures:
real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
This includes all property belonging to the bankrupt at the start of the bankruptcy or that they acquire during the bankruptcy (except for exempt property).
In some circumstances, the bankrupt estate can expand if the bankruptcy period is shown to have commenced before the official date of bankruptcy.
For example, the bankrupt estate may be expanded to include property transfers made prior to the official date of bankruptcy, if the main purpose of the transfer was to defeat creditors.
Which property does not vest in the Bankruptcy Trustee?
Property that does not vest in the bankruptcy trustee includes:
- a) motor vehicles up to a certain value;
- b) tools of trade up to a certain value;
- c) most household items;
- d) some personal property (for example, possessions of sentimental value);
- e) compensation recovered for personal injury claims;
- f) property held by the bankrupt in trust for another person;
- g) life assurance policies; and
- h) some superannuation interests.
Section 116(2) of the Bankruptcy Act 1966 (Cth) contains a full list of “exempt property.”
What is the role of the Bankruptcy Trustee in Family Law proceedings?
The bankruptcy trustee cannot initiate family law proceedings. They may elect to become a party to family law proceedings that:
- had already commenced at the time of bankruptcy, or
- were subsequently commenced by the non-bankrupt party.
However, this is not mandatory.
If the bankruptcy trustee does become a party to proceedings, the bankrupt cannot make submissions to the Family Court about property that has already vested in the bankruptcy trustee (without express permission of the Court).
Practically speaking, matters involving a bankruptcy trustee usually involve negotiations or litigation between the bankruptcy trustee and the non-bankrupt party only.
Any amount that the bankrupt party receives by way of family law property settlement will become property of the bankruptcy trustee. The bankrupt will normally use these funds to meet any of their debt requirements.
How does the court deal with bankruptcy in s79 proceedings?
As is the usual course of property proceedings, the Family Court will adhere to the Four Step process to resolve the issue at hand, albeit with some notable considerations.
1. Identify and value the assets, liabilities and resources of the parties;
The Family Court is likely to be dealing with three types of property:
- The bankrupt’s property which vests in the bankruptcy trustee;
- The bankrupt’s property which does not vest in the bankruptcy trustee (for example, the bankrupt’s interest in a superannuation fund); and
- The non-bankrupt party’s property.
2. Consider the contributions of the parties made throughout the relationship;
Each party’s direct and indirect financial, non-financial and home-maker contributions to the marriage. Examples of these contributions include:
- the non-bankrupt party’s conduct or knowledge of events leading up to the bankruptcy, and
- considerations such as the degree of the non-bankrupt party’s contribution to the bankruptcy.
3. Consider the future needs of each party;
Pursuant to Section 75(2)(ha) of the Family Law Act, 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.
4. Determine whether the proposed settlement is just and equitable.
To this end, the Family Court must consider the competing rights of the bankrupt party’s creditors and the non-bankrupt party equally. Neither party has priority or preference over the other.
To achieve a just and equitable between parties, the Family Court may make Orders for:
- the transfer of property vested in the bankruptcy trustee at the date of bankruptcy to the non-bankrupt spouse;
- a debt which is part of the bankruptcy to be paid from exempt property which has not vested in the trustee in bankruptcy;
- that the non-bankrupt party receive some or all of their entitlements in superannuation so that there is more non-exempt property available for the bankruptcy trustee.
What about bankruptcy and defacto couples in WA?
Currently the Family Court of Western Australia does not have jurisdiction to concurrently hear family law and bankruptcy matters for defacto couples.
Given Western Australia has retained the power to make orders relating to de facto couples pursuant to the Family Court Act 1997 (WA), de facto couples do not currently have access to the same process.
As a result of the current state of legislation, de facto couples with concurrent family and bankruptcy matters must pursue them in different courts:
- family law proceedings in the Family Court of Western Australia; and
- bankruptcy proceedings in the Federal Court of Australia or the Federal Circuit Court of Australia.
Enter, the Family Law Amendment (Western Australia De Facto Superannuation Splitting And Bankruptcy) Bill 2019 (“the Bill”).
Introduced in November 2019, the Bill proposes an extension of the federal bankruptcy jurisdiction. This extension allows the Family Court of Western Australia to hear bankruptcy and family law matters at the same time for separating de facto couples.
The Bill’s Explanatory Memorandum promised such reform would:
ensure greater access to justice for separating de facto couples in Western Australia, who will no longer need to go to the time and expense of being involved in proceedings in two different courts. By enabling bankruptcy and family law proceedings to be brought together in the FCWA, the Bill will ensure property issues are dealt with simultaneously and will provide greater certainty to bankruptcy trustees, creditors and non-bankrupt partners.
Watch this space.
What now?
Whether you are the:
- bankrupt party in family law proceedings,
- anticipating bankruptcy is not far away, or
- non-bankrupt party dealing with a bankrupt party,
You should seek legal advice specific to your situation. Tailored legal advice is particularly important if you have any questions that relate to any necessary notifications and procedures.
In cases where you are the non-bankrupt party in family law proceedings, it may even be necessary to urgently apply to the Family Court for an injunction. This is because an injunction can restrain the bankruptcy trustee from distributing dividends amongst the creditors of the bankrupt estate.