What happens if you or your ex-partner goes bankrupt before, during or after your separation?

Much of the separation process in Australia is dedicated to each of the separating people disclosing their property. That property is then distributed in a just and equitable way that is fair to both (having regard to all the circumstances).

Bankruptcy, however, is a process that’s designed to do much the same thing but is focused on the individual who is bankrupt and has a broader audience for the distribution of that property (the people they owed money to).

So with that significant overlap, how do bankruptcy and family law interact together?

Understanding Bankruptcy in Brief

While this article is not designed to be a complete explanation (you can find more at AFSA here), bankruptcy in a nutshell involves:

1. Most (not quite all – but most) of the property of the bankrupt “vesting” in (that is – being put under the control of) a person called the Trustee in Bankruptcy;
2. The Trustee selling what property can be sold;
3. The Trustee investigating whether there are any transactions prior to their appointment that could be overturned; and
4. Once that’s done, the Trustee distributing money to the people who were owed money by the bankrupt, and monitoring their income to see if they are lawfully required to make further contributions to the process while they are still bankrupt.

So, if your ex is involved in bankruptcy and you are about to go through, or actually going through, separation, then you can see how these things might directly impact the outcomes. That includes the property settlement process in particular, but also spousal maintenance and child custody matters that might come up along the way.

With that in mind, here are a few common factors in the interplay between bankruptcy and family law matters.

Bankruptcy and Property Settlements

If you or your ex are bankrupt, there is now another person involved in the situation: the Trustee in bankruptcy.

Since that Trustee essentially “owns” the assets of the bankrupt person, they often end up being a party to family law proceedings. This is because, of course, the Court may want to hear from the person who is directly interested in the outcome of any property settlement orders that might be made.

If they do become a party to the proceedings, this results in a slightly unusual situation where:

1. The Trustee will be making submissions or communications concerning the bankrupt party’s property; but
2. The bankrupt party will still be able to make submissions or communications in relation to the non-bankrupt party’s property (since that property is not subject to the control of the Trustee).

Bankruptcy and Child Support or Spousal Maintenance

As a general principle, child support payments and many spousal maintenance orders tend to fall outside the bankruptcy regime.

That means if a bankrupt person is required to make payments, they will often still be required to do so:

1. while bankrupt; and
2. after their bankruptcy ends.

There are a few exceptions here, so you should get some specific advice before making assumptions. And, of course, the bankruptcy will possibly impact the various factors that go into making a spousal maintenance order or having one amended.

Will Property be Sold in Bankruptcy before Family Law Proceedings are Finished?

As we have mentioned above, one of the Trustee’s jobs is to collect property and sell it so that the proceeds can be distributed between others to whom the bankrupt owed money.

Naturally this is going to have a direct impact on the non-bankrupt spouse, especially if some of that property might be property they hoped to receive as part of a property settlement (rather than just money).

If there is a risk that the Trustee in bankruptcy might sell assets and distribute the proceeds before the family law process is finished, the non-bankrupt spouse can consider asking the Court for an injunction.

An injunction is an order that would prevent the Trustee from doing certain things while the rest of the proceedings were finalised or a negotiated outcome was reached. They can be tricky to get, but are sometimes needed to protect one party from unfair outcomes.

Bankruptcy After Agreement

Fundamentally the Trustee in bankruptcy is there to protect the interests of people to whom the bankrupt person owes money – the creditors.

One of the broader powers a trustee has is investigating transactions (which, in essence, means nearly anything) that seem to have been done to "defeat” creditors.

The classic example is an about-to-be bankrupt who transfers a $10m mansion to their sister for $1 just before they go bankrupt. They then simply continue to live there as they always did before. Obviously the law does not tend to allow that to stand and has principles in place to unwind it.

The same principles can apply, however, in relation to some family law matters.

So, for example, if separating spouses agree on a situation where one transfers a lot of assets or property to the other, only to then go bankrupt, they might find that transaction gets a close look by a Trustee in bankruptcy to see if it was above board.

While there are a number of hoops to jump through, a Trustee will be looking closely at anything that involves the bankrupt spouse getting rid of large sums of money or assets without solid reasons to do so or appropriate compensation.

Bankruptcy and Family Law Matters – Wrap Up

Unfortunately, separation can be accompanied by significant financial distress for one or both partners. If one goes into bankruptcy, things will inevitably get slightly more complicated. There might be more complex negotiations, more expensive dealings with a Trustee in bankruptcy, and a longer Court process to ensure that all the boxes have been ticked.

That said, it is still something that can be dealt with, provided you have the right advice and a solid approach to your separation.