In 2005 and 2009, crucial amendments were made to the Bankruptcy Act 1966 (Cth) and the Family Law Act 1975 (Cth) that bestowed jurisdiction upon the Family Court of Australia in bankruptcy for married and de facto couples.
Under s 58 of the Bankruptcy Act, all property held by a bankrupt or acquired during bankruptcy vests in the trustee for bankruptcy. A right to litigate does not constitute ‘property’ as these are personal rights of action (though any property acquired by an undischarged bankrupt in the course of property settlement proceedings would vest in the trustee). However, s 60 of the Bankruptcy Act states that, “an action commenced by a person who subsequently becomes bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action”. While there are some narrow exceptions provided in s 60(4), family law proceedings do not fall within these.
Plainly, the legislation states that an undischarged bankrupt is precluded from bringing or continuing family law proceedings. Their claim to a family law property settlement will vest in their bankruptcy trustee, provided the trustee elects to continue the action. As the fruits of the claim will become part of the bankrupt estate available for division amongst creditors, it is difficult to fathom circumstances in which a trustee for bankruptcy would not elect to pursue the property settlement (and a failure to do so may constitute a breach of their duties pursuant to s 19 of the Bankruptcy Act).
Interestingly, the legislation as drafted is framed in such a manner that family law parenting proceedings are also stayed in bankruptcy. A technical argument may be made in circumstances of abuse or family violence that the proceedings relate to a “wrong done to a bankrupt … or a member of his or her family”: Bankruptcy Act s 60(4)(a). However, this is an untested area of law. As Gill J stated in Sloan & Sloan  FamCA 610 (1 August 2018), “this effect of s 60 makes no sense and potentially undermines the well-being of children, without any corresponding benefit being conferred on creditors (if such benefit could be weighed against the welfare of a child).” The legislature may consider amending this provision to prevent parenting proceedings being stayed in a manner contrary to a child’s best interests.
Once the Trustee is a party to property settlement proceedings, they have wide-ranging powers to seek a property settlement on behalf of the bankrupt spouse. They are also able to set aside court orders or Financial Agreements that attempt to defeat creditors and avoid the distribution of assets under bankruptcy.
If you become aware that your former partner has been or may be declared bankrupt, this may have a substantial impact on your property settlement. We recommend that you obtain legal advice as soon as possible to minimise the impact of your partner’s bankruptcy on your property settlement entitlements.
At Frank Law, we offer clients a Free First Conference where we can provide specialist legal advice about the impact of bankruptcy on family law matters.
If you have further questions, please contact Matthew Sibley at email@example.com
This is not legal advice.