A spouse becoming bankrupt does affect the way a Court has to deal with property division

If you are involved in family law property proceedings and the other party to the marriage or de facto relationship goes bankrupt it will affect the way in which the Family Court is able to deal with the proceedings.

When a person is bankrupt all their property, including personal property and real property, becomes vested in the Trustee in Bankruptcy. The bankrupt person is not able to transfer or deal with any of their assets and this causes problems in relation to the transfer of property pursuant to a property settlement.

Whilst the Trustee in Bankruptcy will hold the majority of the assets of the bankrupt person it is important to remember that a bankrupt person is allowed to keep certain assets including:

• Household items;
• Furniture and personal effects;
• Life insurance policies;
• Superannuation policies;
• Tools of trade to a certain value;
• Motor vehicles up to a certain value.

When one party to a marriage or de facto relationship becomes bankrupt the Family Court has the power to make the Trustee in Bankruptcy a party to any property proceedings in the Court. This allows the Court to consider the rights of creditors and the rights of the other party to the marriage or de facto relationship prior to making any orders for a property settlement.  There is no set rule that a non bankrupt party to property proceedings will be given priority by the Court over creditors of the bankrupt person.

If you are involved in property proceedings in the Court and the other party to the proceedings has gone bankrupt the most important thing to do is to obtain legal advice as quickly as possible. By getting expert legal advice early your solicitor will be able to advise you on how to gain priority over any creditors of the bankrupt.

Expert legal advice will assist you in asking the Court to make orders for the Trustee in Bankruptcy to transfer property of the bankrupt person to you so that it can not be distributed to any creditors of the bankrupt.

The Court also has the power to set aside any property settlement order if it was made at a time when one of the parties to the marriage or de facto relationship was bankrupt or became bankrupt after the making of the property settlement order.

The most important thing to remember if you are involved in property settlement proceedings where the other party to the marriage or de facto relationship is bankrupt is to obtain expert legal advice to ensure your entitlement to a property settlement is protected.