Family Law - The Competing Issues of Bankruptcy and Family Law

Date: January 13, 2010

Authors: LAC Lawyers

Family law property settlements or applications for spousal maintenance may be further complicated where one spouse is bankrupt or considering bankruptcy. In these circumstances, a conflict clearly arises between the competing interests of a trustee in bankruptcy and the separated non-bankrupt spouse in determining how property should be distributed between the parties.

Currently, conflicts between the trustees of bankrupt estates and the separated spouse may be resolved by the Family Court who are empowered to make orders about property distribution even if such property is in the trustee in bankruptcy’s possession.

Where family law proceedings have commenced, a trustee in bankruptcy may generally apply to be joined as a party to the proceedings if the Family Court are satisfied that the interest of creditors may be affected by any property orders that may be made.  

In considering how property matters should be resolved in the context of bankrupcty, the Court must follow the ordinary principles governing the distribution of property between spouses and, also have regard to the effects of a potential order on the ability of creditor to recover their debt from the bankrupt spouse. The effects of an order on creditors is given particular attention when determining whether adjustments should be made in accordance with section 75(2) factors of the Family Law Act 1975 (Cth), that is, adjustments of property interest in consideration of factors including the health, age, earning capacity of the parties and whether either party has care of children of the relationship under the age of 18. If the creditor’s interests are given greater priority than the interests of the non-bankrupt spouse, then the Court may consider it inappropriate to make any further adjustments to the property division based on these section 75(2) factors. However, it is important to note here that the balance of consideration must be towards avoiding the imposition of an injustice and hardship on the non-bankrupt spouse.

Further, where a non-bankrupt spouse has derived significant benefit from the actions of the bankrupt spouse, the Court may atttribute some responsibility to that spouse even though there may have been little control in terms of the bankrupt’s actions. This may have an impact on determinations of contributions to the asset pool between the respective spouses.

Also when parties consider entering into Binding Financial Agreements to resolve their property matters, it is important to keep in mind that such agreements may be set aside by the courts if either party entered into the agreement with a reckless disregard of the interests of any creditors or with the purpose of defeating their interests.

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