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An Introduction to Bankruptcy & Family Law

It is common for the pressure and stress caused by prolonged financial problems to lead to relationship breakdown. Conversely, also the breakdown of a relationship can cause financial problems. When this happens, it means that both bankruptcy and family law will have to be dealt with concurrently. 

While severe financial problems are very stressful, this stress increases If you do not understand what you can do to fix the problem. Likewise, relationship breakdown is very stressful and if you do not understand the family law process for your finances, children and divorce, your stress levels can escalate. 

At Understanding Bankruptcy our aim is to help you understand how bankruptcy works. This will enable you to decide whether bankruptcy is a solution for you. To assist persons who are dealing with a relationship breakdown and financial problems we have asked Tim Nicholls a family lawyer to write a number of articles to give you an introduction to how the family law process works and how bankruptcy and family law work together. If you are dealing with financial problems and relationship breakdown, these articles will hopefully assist to give you greater understanding of how the two issues each work and interrelate to help you go forward and reduce your stress levels.

It is worth noting that the Bankruptcy Act 1966 and the Family Law Act 1975 have both been written with the purpose of resolving problems. However, the two pieces of legislation take a very different approach. The Bankruptcy Act takes a commercial approach towards resolving the financial problem while the Family Law Act takes a discretionary approach towards resolving and finalising your marriage or defacto relationship.  This difference in approach can cause confusion for you when you are faced with both financial problems and the breakdown of your relationship. 

The Bankruptcy Act seeks to help you resolve your financial problems by removing potentially all your liabilities and protecting essential assets to assist you to recover and get going again.

The Family Law Act seeks to equitably redistribute the assets of the relationship and no assets are protected. Due to the very nature of a relationship breakdown, the Family Law legislation needs to cover far more ambiguous areas and is not straight forward. For example, it has to deal with issues like children, health and wellbeing. Every relationship and family are different, and a broad approach is taken to accommodate this. 

It is worth noting that the Family Law legislation has three separate components:

1/ divorce,

2/ property matters, and

3/ parenting matters.

The area of direct contact between bankruptcy and family law is in regard to property matters. 

When you become bankrupt, your bankrupt estate takes over your property entitlement in the family law proceedings and does not get involved in the divorce or parenting components. Having said that, the parenting matters may affect the property distribution that the Family Law Court determines the bankrupt estate is entitled to. 


In simple terms, when you are bankrupt and dealing with your family law property matter, the bankruptcy trustee takes your property which is not protected under the Bankruptcy Act and is in accord with your family law entitlement. Your former spouse takes property that is in accord with his or her Family Law entitlement. This family law entitlement will be determined by the Family Court without consideration to the protection that the Bankruptcy Act provides for your assets. This means that under Family Law your former spouse can claim assets that the Bankruptcy Act protects for you.

We provide the following simple examples to demonstrate this. 

1/ Dave and Sue have no assets, but Sue has Superannuation of $75,000 and Dave has super of $15,000. Sue has creditors of $95,000 and has filed for bankruptcy. In bankruptcy, Sue’s Super is protected and not available to her Bankrupt Estate. However, Dave has commenced family law proceedings and has claimed that he is entitled to a third of Sue’s Super. Dave is entitled to do this in the family law proceedings even though Sue’s super is protected from her creditors in her bankruptcy.

2/ Tom and Jane have a house with $50,000 equity, Tom has two cars with a combined value of $8,000 and their household furniture which they purchased together is worth $10,000. Tom has credit card debt of $115,000 and has filed for bankruptcy. Under the Bankruptcy Act, Tom’s cars and household furniture are protected. Jane has commenced family law proceedings and has claimed her half of the equity in the house, $25,000 and all the household furniture. Jane is entitled to make this claim in the Family Law proceedings even though Tom’s furniture is protected from his creditors in his bankruptcy.

To assist you to gain greater understanding on how the Family Law Act works, Tim Nicholls, Family Law Solicitor has written an article giving an introduction to and overview of the Family Law legislation covering property settlements, arrangements for your children and separation/divorce. That article, ‘An Introductory Overview of The Family Law Act’ can be accessed here.

As the main area where the Family Law Act interrelates to the Bankruptcy Act is in regard to property, to make it easier for you to understand how the two pieces of legislation interrelate, Tim Nicholls, Family Law Solicitor has written an article that takes a deeper look at how property settlements are determined by the Family Law Court. This article, ‘An Introduction to Property Settlements – What You Need to Know’ can be accessed here.  

As issues regarding children can impact the determination of the Family Law Court in regard to the property settlement, Tim Nicholls, Family Law Solicitor has written an article to give you an introduction to some of the issues the Family Law Court will consider when making Orders in regard to parenting issues. This article, ‘Arrangements for Your Children – An introduction to What You Need to Know’ can be accessed here.

Having provided you with articles to give an introduction to the Family Law Act 1975, Tim Nicholls, Family Law Solicitor has then written an article to introduce you to how the Bankruptcy Act and the Family Law Act interrelate and provide a quick guide on what to expect when the two pieces of legislation are in play. This article, ‘Bankruptcy and Family Law – An Introduction to What You Need to Know’ can be accessed here.

We hope that these introductory articles by a Family Law Solicitor will assist you to develop your knowledge for a greater understanding on how Bankruptcy and Family Law interrelate. We stress that these articles have been written to provide introductive information only on bankruptcy and family law and are not intended to be legal advice. Everybody’s circumstances are different, and you should obtain specific advice addressing your circumstances.  

We have not spoken about Debt Agreements and Family Law but note that the same issues exist and it is further complicated by the need to also determine how the payment arrangement under the Debt Agreement is going to continue to be paid due to the change in circumstances and potentially higher living costs caused by the relationship breakdown. 

If you would like more information or have questions on Bankruptcy and Family Law  please give us a call on 1300 764 197 or email We are here to help you ‘Understand Bankruptcy’.