Upon bankruptcy, the bankrupt’s property vests in the trustee.
If one spouse of the marriage is an undischarged bankrupt the trustee in bankruptcy can intervene in Family Law proceedings by relying on existing legal and equitable interests of the bankrupt spouse. The trustee can seek an order for a portion of the property pool from the Court.
The Courts will answer an application from the Trustee by determining what the existing property interests are and whether it is ‘just and equitable’ for the Court to make any order altering interests in property.
You should be aware that only superannuation, household goods, tools of trade up to $3,400 and a motor vehicle up to $6,850 are exempt from the reach of the Trustee. The family home may be “clawed back” by the Trustee if there has been a transfer of property by the bankrupt to the spouse within the 6 months prior to the act of bankruptcy occurring. Any transfer of property which gives a preference to another person over the interests of other creditors can be voided by the trustee.
If you are the non-bankrupt spouse
Non-bankrupt spouses who have benefited from the actions of a bankrupt spouse, whether they conspired together to defeat creditors, may find it difficult to keep assets away from the Trustee.
If family law proceedings are already on foot, consideration needs to be given as to whether the non-bankrupt spouse is better off continuing the proceedings by joining the trustee or discontinuing them because the spouse is better off relying on their entitlement without the assistance of the Family Law Act 1975 (Cth).
One of the leading cases on the intersections of bankruptcy and family law is Trustee of the Property of G Lemnos and Lemnos (2009). In this case the Trustee successfully appealed against property orders which required that the former matrimonial home, which had vested in the trustee, be sold and the net proceeds divided equally between the Trustee and the wife. It is important to note in this case that the liabilities of the parties exceeded the assets and the Trustee was never going to receive full payment of the debt.
At first instance the Trial Judge, L Poer Trench J, found that the Wife had contributed directly to the matrimonial home through her income and contributions were assessed as equal at the date of the trial. On appeal the Full Court of the Family Court held that the interests of unsecured creditors did not automatically prevail over the interests of the non-bankrupt spouse and their competing claims must be balanced.
On appeal the Wife argued that the Husband wasted assets by acting recklessly and negligently in completing his tax returns, an act wholly within his knowledge. For 12 years the Husband claimed outgoings on a property which was usually his primary residence. The majority found that the Husband’s conduct was designed to increase the property pool. The Wife received the benefit from the Husband’s misconduct, and it was neither just nor equitable for her to escape all responsibility for payment of the primary tax.
The sentiment expressed in this case and previous cases is that spouses will generally “take the good with the bad”.