When a Spouse or De Facto Partner Becomes Bankrupt

Under Section 5 of the Bankruptcy Act of 1996, a bankrupt is a person against whose estate a sequestration order has been made or who has become bankrupt because of a debtor’s petition. Section 35 of the Bankruptcy Act vest in the family courts jurisdiction in bankruptcy where a trustee is a party to property settlement or spousal maintenance proceedings.

The jurisdiction of the Family Court and Federal Circuit Court in bankruptcy cases applies both to parties to a marriage and de facto relationship. Specifically, the Family Courts and the Federal Circuit Court have jurisdiction on the following bankruptcy related cases:

• Section 79 or 90SM of the Family Law Act 1975 (FLA) for property settlement;
• Section 74 of the FLA for maintenance orders;
• Section 78 or 90SL of the FLA for declaration of interest in property;
• Section 79A or 90SN of the FLA for the setting aside of property orders;
• Section 90SE for maintenance applications in a de facto relationship; and
• The enforcement of the abovementioned orders.

A spouse or de facto partner who is a party to property, maintenance or child support applications is required to immediately inform the Court if they are bankrupt or have become bankrupt during the proceedings. Failure to do so might be construed as an attempt to defraud the creditors of the bankrupt. Any person, including a creditor who is affected by a court order made in property settlement or maintenance proceedings can apply to have the order set aside. The same remedy is available to a trustee.

The property of a bankrupt spouse or de facto partner immediately vests in the trustee. The trustee is the one who administers the estate of the bankrupt such that the bankrupt party cannot anymore transfer property or file an action to recover an interest in property because it will be the trustee who does that. The job of the trustee is to sell all or sufficient property of the bankrupt party and distribute the proceeds of the sale to the creditors. The trustee can apply to the Court to be a party to the family law proceedings and when he is admitted, the bankrupt party cannot make submissions in relation to vested property unless with the permission of the court.

The non-bankrupt spouse or de facto partner is not prioritized over the other creditors. The Family Court or the Federal Circuit Court will be considering the rights of the other creditors with the rights of the non-bankrupt party. A non-bankrupt spouse or de facto partner can apply to the Court for injunction to restrain the trustee from disposing of property of the marriage or de facto relationship to the other creditors.

Upon application, the Court can also order the transfer of the vested property to the non-bankrupt spouse or de facto partner. Once the court orders transfer of property to the non-bankrupt party, such property will no longer be distributed to the other creditors. Pre-action procedures are not required in bankruptcy related family law cases.

Vested property is property of the bankrupt that is under the possession and control of the trustee. Vested property includes property of the bankrupt at the start of the bankruptcy or property that is acquired during the bankruptcy and which is automatically vested in the trustee. Some properties are exempted from becoming vested property and Section 116 of the Bankruptcy Act provides the definition of exempt property. Examples of exempt property are household items, insurance policies, right to recover compensation for damages or injury, superannuation, tools, or the car that is being used by the bankrupt party.