Bankruptcy and Family Law

Bankruptcy lawyers and family lawyers deal primarily with two different and distinct pieces of legislation. Bankruptcy lawyers deal with the Bankruptcy Act 1966 (“BA”), while family lawyers refer to the Family Law Act 1975 (“FLA”).

The introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (“BFLAA”) substantially changed the landscape in respect to bankruptcy and family law. The BFLAA gave the Family Court jurisdiction to deal with matters relating to a bankrupt’s property and a bankrupt spouse in circumstances in which previously the Family Court’s role was limited once a party became bankrupt.

The BFLAA permitted concurrent bankruptcy and family law proceedings to be brought together in the Family Court to ensure that all the issues are dealt with at the same time. The BFLAA allows clarification of the competing rights and interests of the creditors and the non-bankrupt spouse where bankruptcy and family law issues co-exist.

The BFLAA gives the Family Court power if there were property proceedings on foot to make Orders about property which had vested in the trustee in bankruptcy.

Bankruptcy disputes between married and de facto couples are now dealt with under the Family Law Act. A non-bankrupt spouse or de facto can make a claim in the Family Court for property vested in the trustee in bankruptcy. However, before doing so, the bankrupt will need to join the trustee in bankruptcy to the proceedings or have the trustee’s permission to apply to the Court.

What property is protected?

The Bankruptcy Act provides that property owned by the bankrupt vests in the trustee in bankruptcy. However, superannuation, some household goods, motor vehicles to a value of $6,850 and tools of trade of $3,400 cannot be clawed back. Payments made to a superannuation fund in order to defeat creditors can be clawed back.

Claw back provisions

Transfer of property made by a bankrupt spouse to a non-bankrupt spouse to defeat creditors can be clawed back for the period from 6 months prior to the bankruptcy. Mistakenly, spouses likely to go bankrupt transfer property that is in their name to their spouse believing this will avoid the trustee in bankruptcy having a claim to the property. Unfortunately for the bankrupt spouse, the trustee in bankruptcy can claw back any transactions made from 6 months prior to the act of bankruptcy.

Transfers of property are void if the main purpose of the transfer was to defeat creditors or to prevent the transferred property from becoming divisible among creditors or to hinder or delay the process of making property available for division among the creditors.

A transfer by a person who is insolvent to a creditor is also void against the trustee if the tansfer gave the creditor a preference, priority or advance over other creditors and was made within usually 6 months before the bankruptcy commenced.

Further, transfers of property by a bankrupt may be void against a trustee if made within 5 years of the start of the bankruptcy and there was no consideration, or the transfer was for less than market value. Market value consideration does not include family relationship, marriage or de facto relationship, promise to marry or partner or love or affection.

Transfers are not void against the trustee if they were made more than 4 years before the commencement of bankruptcy for related entities and 2 years before the commencement of bankruptcy for all other cases, and the transferee proves that at the time of the transfer, the transferor was solvent.

The trustee in bankruptcy has to be joined as a party to the Family Court proceedings as they are not automatically a party to the proceedings. If the trustee in bankruptcy is joined, the trustee steps into the shoes of the bankrupt and the bankrupt loses the right to make submissions with respect to the property which has vested with the trustee. However, the bankrupt continues to have the right to make subsmissions about property which has not vested in the trustee, such as superannuation. The bankrupt trustee may choose not to remain in the proceedings and may give the bankrupt spouse permission to litigate in the Family Court.

What about Financial Agreements or Consent Orders?

Consent Orders are approved by the Court and therefore a transfer of property of a person who is bankrupt is protected and cannot be clawed back unless the parties did not inform the trustee of the bankrupt spouse and did not make full and frank disclosure of their assets and liabilities to each other and creditors. However, a Financial Agreement (“FA”) is a private agreement between two parties and therefore it can be set aside.

Creditors have standing to apply to set a FA aside and the claw back provisions in the BA can be used by the trustee in bankruptcy to recover property transferred in accordance to a FA. It is also an act of bankruptcy if a person becomes insolvent due to a transfer of property in accordance with a FA.

What about Spousal Maintenance Orders?

Generally a maintenance order can be registered with the Child Support Agency (“CSA”). The CSA will enforce the Order by garnishing the bankrupt’s wages or intercepting their tax returns. Any amount outstanding or not paid by the bankrupt will accrue and be recovered before, during or after the bankrupt is discharged from bankruptcy unless the Court orders otherwise.

A bankrupt can generally earn and retain approximately $46,018 per annum (“the threshold”) if he or she has no dependants. This amount increases with the number of dependants. 

If a bankrupt encounters financial difficlties post-bankruptcy, it may be possible to petition the court for a modification of spousal maintenance. However, the bankrupt will more than likely have to demonstrate a substantial change in circumstances or some sort of hardship.

What about Child Support?

Section 139N of the BA allows a bankrupt spouse to enter into a Binding Child Support Agreement (“BCSA”). The BCSA may allow a bankrupt to meet preferentially, certain expenses for their children from their above threshold income.