Family Courts have jurisdiction to make financial orders that affect property in a bankruptcy

Marital hardship leading to divorce and financial hardship leading to bankruptcy often go hand-in-hand. But how does bankruptcy affect property settlements and obligations to pay child support and spousal maintenance?

The answers to these questions are found in the Bankruptcy and Family Law Legislation Amendment Act 2005.

The law gives jurisdiction to the Family Court to make orders that affect property formerly belonging to a bankrupt that has vested in the bankruptcy trustee. The Family Court must balance the rights of creditors with the entitlement of a divorcing spouse to his or her fair share of the property pool.

What happens to a bankrupt’s property in a divorce?

When the party to a divorce becomes bankrupt, much of that person’s property becomes vested in the bankruptcy trustee. That means that the trustee, not the bankrupt, controls the property. The trustee’s job is to use that property to benefit the bankrupt’s creditors. While the bankrupt spouse may lose property in a bankruptcy, the bankrupt is entitled to keep certain property, including superannuation, household goods, and a vehicle that does not exceed a certain value. That property is subject to the Family Court’s orders as if the party were not bankrupt.

Although property that has vested in the bankruptcy trustee can no longer be controlled by the divorcing spouse, the Family Court has the power to make the bankruptcy trustee a party to the Family Court proceeding. The Family Court can order the trustee to transfer property under the trustee’s control to the bankrupt’s spouse rather than to other creditors. The Family Court can also order payment of spousal maintenance as a lump sum through a transfer of property that has vested in the trustee, protecting that property from other creditors.

What is the bankruptcy trustee’s role in divorce proceedings?

The law limits the ability of a bankrupt to make submissions to the Family Court concerning property settlements or the payment of spousal maintenance if those payments or property transfers would come from property that has vested in the bankruptcy trustee. Since the trustee, not the bankrupt, has control of vested property, it is within the trustee’s power to make those submissions to the Family Court. The trustee’s submissions may seek to protect other creditors, not just the spouse of the bankrupt. It is up to the Family Court to balance the competing interests of other creditors and the bankrupt’s spouse.

How will the bankrupt spouse pay court-ordered obligations?

When the Family Court orders a party to pay obligations (including spousal maintenance and child support) from his or her income, the Official Receiver can garnish that party’s wages and bank accounts to collect those contributions. Since that may not be a helpful remedy when a spouse is self-employed, the law gives the bankruptcy trustee access to all the bankrupt’s income before it reaches the bankrupt. The trustee can use that power to assure that court-ordered obligations are paid despite the bankruptcy.