If you are the spouse in a Family Court proceeding who becomes bankrupt, your property is immediately vested in the Trustee in bankruptcy (“the Trustee”) except for your:
1. superannuation. (However, if you made payments made to a superannuation fund in order to defeat creditors those payments can be clawed back);
2. necessary household goods (beds, fridges etc);
3. motor vehicles to a value of approximately $7,200 (if the vehicle is worth more than this, the trustee can take the vehicle and must refund the bankrupt $7,200);
4. tools of trade of approximately $3,550; and
5. proceeds of certain damages claims for compensation, and any property purchased with, or substantially with, the proceeds of such a claim
The Trustee has to be joined as a party to the Family Court proceedings as they are not automatically a party to the proceedings. The Family Court will grant an application of the Trustee to join the Trustee as a party to the proceedings where the Court is satisfied that the interests of the bankrupt’s creditors may be affected by the proceedings.
If the Trustee is joined, the Trustee steps into the shoes of the bankrupt. As a bankrupt you will therefore lose your right to make submissions regarding property vested in the Trustee. You will be required to seek the Court’s permission to make submissions which will only be granted in exceptional circumstances. However, as a bankrupt you can make submissions about property which has not vested (such as superannuation) and to make other submissions which may indirectly deal with vested property.
As a bankrupt, the issue which you will mainly be concerned about is whether certain transfers of property made by you can be “clawed back” by the Trustee. The Bankruptcy Act provides that certain transfers can be “clawed back”:
1. If you transferred property to your non bankrupt spouse within six months before you declared bankruptcy (in order to defeat creditors), the transferred property can be “clawed back.”
2. If you made other transfers of property for the main purpose of preventing the transferred property from becoming divisible among creditors or to hinder or delay the process of making property available for division among the creditors, those transfers will also be “clawed back.”
3. If you were insolvent and you made a transfer to a creditor, that transfer will be void if the transfer gave the creditor a preference, priority or advantage over other creditors and occurred within six months before the bankruptcy commenced.
4. If you made other transfers of property within five years of the start of the bankruptcy and there was no consideration, or the transfer was for less than market value, those transfers will also be void against the Trustee. Market value consideration does not include family relationship, marriage or de facto relationship or love and affection.
However, transfers are not void against the Trustee if they were made more than four years before the commencement of bankruptcy for related entities and two years before the commencement of bankruptcy for all other cases, and the transferor was solvent at the time of the transfer.
5. What about transfers made pursuant to 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.
As a bankrupt you must tell the trustee if you are involved in, or become involved, in family law property or spousal maintenance proceedings. You must also disclose to the Trustee any family law property or spousal maintenance orders that you are a party to.
If you become bankrupt after the finalisation of family law property orders or spousal maintenance orders, the Trustee may apply to vary or set aside those orders.
6. What about transfers made pursuant to a Financial Agreement? A Financial Agreement is a private agreement between two parties and therefore it can be set aside. Creditors have standing to apply to set aside a Financial Agreement and the claw back provisions in the Bankruptcy Act can be used by the Trustee to recover property transferred pursuant to a Financial Agreement. It is also an act of bankruptcy if you become insolvent due to a transfer of property in accordance with a Financial Agreement.
If you are in situation where you are the bankrupt spouse in a family law proceeding, we recommend you seek legal advice as this is a complex area of law. You may contact our Family Law team at HHG who can provide advice tailored to your specific circumstances.
This is only general information and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.