When Family Law and bankruptcy issue collides, a complex situation will likely take place especially in the application of section 58 and section 116 of the Bankruptcy Act 1966 in connection with the settlement or proceeding on property under the Family Law.
The issue will dwell on how to deal with the property of the bankrupt spouse and how will it affect the non-bankrupt spouse. Section 58 of the said Act talk about the divisible properties of the bankrupt spouse being vested to the trustee while section 116 deals with tools of the trade, furniture, transportation property and superannuation being exempt.
In property proceeding, the Bankruptcy and Family Law Legislation Amendment Act 2005 protects the non-bankrupt spouse who is allowed to seek support spousal maintenance from the bankrupt spouse. This is because the income of the bankrupt spouse is no longer vested in the trustee as provided for by section 58 and 59 of the Bankruptcy Act which applications are subject to orders made under Part VIII of the Family Law Act 1975.
A trustee can be made a party or be joined with one party to a property settlement of the bankrupt spouse and the non-bankrupt spouse if the court is satisfied that the creditors of the bankrupt spouse will be affected by the settlement as stated in section 79(11) of the Family Law Act. Both the creditor and the non-bankrupt spouse have treated alike, and both their rights are to be considered and recognised in equal footing as held in the case of Billtoff and Billtoff (1995) FLC 92-614, the Full Court of the Family Court of Australia at Perth. In this case, it was ruled that there are sometimes well-recognized exceptions to the general rule because the general rule is not absolute. It was further stated that there is no requirement that the rights of the unsecured creditor will have to take precedence over the rights of the spouse nor there is a rule of priority between them.
The property of the bankrupt spouse is now shared by a non-bankrupt spouse, and the proceeding was meant to refer to a party to the marriage or the trustee of the bankrupt spouse to a marriage. If it is required that the trustee will be made a party to this proceeding, the bankrupt spouse has to obtain a leave in order to make submissions in court.