Bankruptcy can have a significant impact on a property settlement matter. A person is considered bankrupt when they are unable to pay their debts as and when they fall due.
When a person is declared bankrupt (“the bankrupt”) under the Bankruptcy Act 1966 (Cth), a Bankruptcy Trustee (“the Trustee”) is appointed to take control of the bankrupt’s assets and income. Assets may include, but are not limited to, real estate and money in bank accounts.
The assets ‘vest’ in the Trustee. Once a Trustee is appointed, the bankrupt can no longer deal with or control their vested assets. Amongst their other duties, a Trustee is required to repay money that the bankrupt owes to creditors. They are able to claim and sell the vested assets and distribute the net proceeds amongst creditors.
Some assets the bankrupt is allowed to keep include most ordinary household items of value such as furniture, television and appliances. Other items that are protected are tools of trade and a motor vehicle as long as they are below a set amount. Superannuation is also generally protected upon bankruptcy from creditors as it is considered an exempt divisible asset.
Commencing Property Settlement Proceedings
Either the bankrupt party or the non-bankrupt party are able to commence property settlement proceedings. A bankrupt party must notify the non-bankrupt party, the Court, and the Trustee at the beginning of the proceedings that they are a bankrupt; or if proceedings have already commenced, then immediately thereafter.
Under the Family Law Act 1975 (“Cth”) the Trustee cannot itself commence proceedings in respect of property settlement in the Federal Circuit and Family Court of Australia (“the Court”). However, if the proceedings have already commenced before the bankruptcy, the Trustee is able to join in the proceedings.
Once a Trustee joins the proceedings, the bankrupt party is unable to make submissions about the division of their property that has vested in the Trustee. The bankrupt party is only able to make submissions in relation to the non-vested property, which as outlined above, include household items and superannuation. If the Trustee is not joined or does not seek to join the proceedings, then the proceeding will continue without the Trustee.
How does Bankruptcy affect a Property Settlement Proceeding in Court?
The Court will still undertake the standard process when determining whether it is ‘just and equitable’ (i.e. fair) to adjust the parties’ interests in property that is held by either party to the relationship. The property available for division is identified and valued, including any associated debts and liabilities.
The financial and non-financial contributions made by and on behalf of each party, including contributions in the role of homemaker and parent are then required to be considered; as are the future specific needs and characteristics of the parties, including the responsibility for caring for children, income status and the health of the parties. The Court must then consider the practical effects the orders will have on the respective parties.
The property that is identified and valued will be categorised into one of three categories; being as follows:
1) the bankrupt party’s property that has vested in the Trustee;
2) the bankrupt party’s property that has not vested in the Trustee, such as their superannuation and protected personal items; and
3) the non-bankrupt party’s assets.
What is different in proceedings involving a bankrupt party where the Trustee has joined the proceedings is that the Court must take into account the effect of any court order on the ability of creditors to recover their debts. It is important to note however that the interests of creditors do not take priority over the non-bankrupt party. This is even in the event where a court order would result in the Trustee being unable to pay any or all of the bankrupt party’s credits.
As an example, the Court can order that specific property that has vested in the Trustee be transferred to the non-bankrupt party. Once the Court makes a property settlement in favour of the non-bankrupt party, it is available to the Trustee to apply to the Court to set aside the order. The grounds on which the Trustee may do so are limited. The most relevant ground available to a Trustee is that “a miscarriage of justice by reason of fraud, duress, suppression of evidence (including failure to disclose relevant information), the giving of false evidence or any other circumstance” has occurred.
Ultimately, in property settlement proceedings, the Court must balance the competing claims of the non-bankrupt party and the bankrupt party’s creditors. It must do so on a ‘just and equitable’ basis weighing up all the relevant circumstances.
Property settlement proceedings often have a significant impact on the non-bankrupt party. It is important to seek legal advice from an experienced family law solicitor.
If you have any queries in relation to the above, contact Swan Family Lawyers on 8227 1970 and we will be happy to assist you.