8 Feb 2015

The Court generally requires that the debts incurred by either or both of the parties should be paid from the property of the parties upon the breakdown of the relationship.  However, the bankruptcy of one party affects how the debts are treated.

 

If your spouse or de facto partner becomes bankrupt, his or her property (except certain assets such as household goods, superannuation, some tools of trade and a motor vehicle up to a certain value) is immediately vested in the Trustee in bankruptcy. 

 

You need to be aware of the introduction of the Bankruptcy and Family Law Legislation Amendment Act (“BFLAA”) in 2005.  Prior to the BFLAA, a non-bankrupt spouse could not make a property claim in the Family Court over property which had vested in a Trustee in bankruptcy.  As a result, the Family Court struggled to resolve disputes between a non-bankrupt spouse and a Trustee in bankruptcy about a bankrupt’s property.  

 

The BFLAA now applies to bankruptcies after 18 September 2005.  In a nutshell, the BFLAA gives the Family Court the power to make orders about property which has vested in a Trustee in bankruptcy.  Specifically, the Family Court has the power to make the following orders:

 

  1. Requiring property vested in the Trustee at the date of bankruptcy to be transferred to the non-bankrupt spouse;

 

  1. Requiring a debt which is part of the bankruptcy to be paid from property which has not vested in the Trustee in bankruptcy; and

 

  1. Requiring that the non-bankrupt spouse receive some or all of their entitlements in superannuation so that there is more non-exempt property available for the Trustee in bankruptcy.

 

The BFLAA also requires the Family Court to consider “the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt, so far as that effect is relevant.”  However, the interest of creditors is only one of many factors to be considered by the Court in determining the overall property division split between the non-bankrupt spouse and the Trustee.  The interests of creditors are not given more or less weight than other factors.

 

In practical terms, what does this all mean for you as the non-bankrupt spouse?  It means that the Family Court will exercise its wide discretion in balancing your competing claims as a non-bankrupt spouse over the property versus the competing interests of the creditors of the bankrupt spouse (or Trustee).  Based on our analysis of the post-2005 case law, we have identified certain factors which may be relevant in how the Court will apply its discretion.  In general terms, the factors are as follows:

 

  1. Whether the proposed Orders to divide the property between the parties take into account the legitimate interests of the creditor;

 

  1. Whether the Court should “ignore” a debt because the bankrupt spouse engaged in a course of conduct designed to reduce or minimise the effective value of matrimonial assets or acted recklessly or negligently with regards to matrimonial assets which had the effect of reducing their value.  For example, whether the debts were incurred pre- or post-separation;

 

  1. The overall financial circumstances of the non-bankrupt spouse and the children of the parties during the period after the debts were incurred and at the time of the property settlement proceedings.  This includes the effect of the proposed orders on the non-bankrupt spouse and the parties’ children;

 

  1. Whether the non-bankrupt spouse knew of the events leading to the other spouse’s bankruptcy.  For example, the nature and degree of the non-bankrupt spouse’s involvement in the business or investment activities of the bankrupt spouse.  Another example is whether, and to what extent, the non-bankrupt spouse benefitted from or contributed to the bankrupt spouse’s insolvency;

 

  1. Whether the Family Court property settlement proceedings are part of a plan to insulate the family assets from creditors or to prevent creditors (or the Trustee on their behalf) from recovering their debts;

 

  1. Whether the creditor knew or should have known of a claim or potential claim by the non-bankrupt spouse to the bankrupt spouse’s property before or at the time that the debt was incurred;    

 

  1. Whether the creditor pursued their claim for payment of the debt prior to bankruptcy or prior to commencement of proceedings in the Family Court and whether the creditor did so in a timely fashion;

 

  1. Whether the creditor (or Trustee), by words or conduct, led or permitted the non-bankrupt spouse to form a reasonable view that the debt would not be pursued and whether the non-bankrupt spouse was thereby induced (whilst acting in good faith) to change his/her financial position;

 

  1. Whether either of the spouses has failed to make “full and frank disclosure” of their respective financial positions at all relevant times;

 

  1. Whether the Trustee has failed to make “full and frank disclosure” of all relevant information as it relates to the identification and valuation of the property comprising the vested bankruptcy property and disclosure of all relevant information relating to provable debts.

 

The above factors are not exhaustive.  If you are in situation where you are the non-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.

 

If you have become bankrupt and are involved in family law proceedings, please refer to our article Bankruptcy and the Bankrupt Spouse. 

 

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.

100 years of Supporting West Australians

"Always fast and thorough service. Thank you"

Sitka Pil

My circumstances at the time I made contact with HHG were dire following my argument being rejected by two no win no fee firms. Following my initial meeting with HHG's employment law team I was left feeling extremely positive by the response and concern shown by HHG in regards to their support of my argument along with their preparedness to pursue an outcome on my behalf.

I accept the fact that nobody really wins in these cases (mental health/ workplace) however the end result was what would be considered most favourable and far in excess of what would have been achieved had I not sought the advice from HHG.

I have no hesitation in recommending HHG to anyone caught up in the messy circumstances I found myself in at the time.

Great advice and five-star commitment to their client!!"

Nathan Lynch

"Thank you for such great assistance with the transaction of Flying Domestics on behalf of Lorna Good. It has been such a pleasure to work with the HHG Legal Group and I look forward to working with you in the future."

Jim Goodwin

"Simon Creek and his team were at all times empathic, professional and confident.  My matter needed to be addressed within a pressing time frame, and their availability at short notice and contact after hours was much appreciated.  It caused me considerable stress, but having such a thoroughly reliable and competent team to call on helped me to feel in control. Although I hope not to need their services again in future, I would be confident in doing so!"

Dr Lana Bell

"A good outcome is what we can expect.  A great outcome is a sign of a company which does the very best for their clients. A very big thank you to Daniel Morris for showing empathy towards my small and much needed legal action.

To HHG Legal Group, thank you for a great outcome.  I would recommend your company to anyone seeking legal services."

Jan Atkinson

"Your support this morning was amazingly kind, not to mention your totally reassuring competence, knowledge and wisdom that you used on my behalf.  It was extremely reassuring to have your knowledgeable support, and I particularly appreciated your real and obvious kindness to me. It means so much at a very difficult time. I'm so grateful to you."

Family Law Client

"Janene was very professional and we established a good rapport quickly. The subject of death and wills can be quite confronting to deal with, however, Janene's approach was soft and accommodating."

Lynette Livesey

"A big thank you to HHG for their professional service, continued support, and wide range of legal knowledge. Our clients have given us nothing but kind words regarding HHG Legal Group and so we have no hesitation in referring and recommending Simon Creek and HHG Legal Group for their outstanding services and legal expertise."

Nigel Plowman, Director at McKinley Plowman & Associates

"Simon is a friendly and practical legal advisor. I have received great feedback from the clients I have referred to him and his team at HHG Legal Group."

Richard Beal, Director at BDO

"Over the last few years, I have been impressed by Simon’s legal ability, management skills, entrepreneurial spirit, personal integrity and people skills. He appears to be that rare breed of lawyer – both knowledgeable and commercial."

Michael Malone, Founder of iiNet

"Our family has been a client of HHG Legal Group over many years.  Business has included drawing up of wills for three generations and preparing of probate for my father in law. I would have no hesitation in recommending HHG Legal Group to anyone requiring such services."

Bernice Climie

"You should be congratulated for the manner in which your staff address clients and we found our dealings with your company, once again a very pleasant experience and we would like to truly thank you for your efforts."

Steve Harvey and Jane Powell

"HHG Legal were absolutely fantastic. Extremely responsive and brought calm to our chaotic family situation through their knowledge and caring attitude. Extremely professional from our very first contact with them and they expertly guided our family though the required legal process over almost a 12 month period."

Amanda Williamson

"Fantastic team! They really care about their client. Tim Colcutt is a 'go that extra mile' guy who gives his client his all. I can't recommend HHG and Tim enough."

Kerry Samson

"I had a fantastic lawyer in Anne Hurley. She helped me out a great deal with good, sound advice in a friendly, professional manner. First class, thanks Anne"

Graeme Hammond

"Marine Plant Systems has been working with HHG Legal Group for a few years now and they continually provide first-class service. Their professional advice has been invaluable to our company."

Carolin Grimm - Marine Plant Systems

"We were kept up to date at all times. Pricing was always updated over the time period so we remained "in budget". Personal access to someone whenever I had questions. All in all a great experience without too much fuss."

Rosslyn Tasker - COO AltusQ Pty Ltd

"Good service you can count on."

Miles Lee

"HHG Legal Group has provided outstanding support as I have taken the journey of buying a business, their professionalism is beyond reproach. Their assistance throughout the Due Diligence process has been invaluable, I would fully recommend them."

Mark Armitage

"Very friendly and efficient service - what a pleasure working with Anne."

Jacques Taylor

"I highly recommend Daniel from HHG Legal Mandurah. When dealing with a complicated legal property matter recently I was extremely impressed by Daniel's honesty and integrity and the legal advice I received. I am very happy with the service from HHG Legal."

Tony Walker