Issues to consider with bankruptcy & family law

Firstly, we would like to welcome you to our blog.

Whether you are looking for more information about bankruptcy and family law, contemplating bankruptcy as an option for you or you are currently in bankruptcy while dealing with family law issues, our aim is to provide you with information that is easy to understand and assist you to navigate your situation.

We also understand that the thought and contemplation of divorce and separation can be incredibly stressful and troubling for you. The intersection between family law and bankruptcy is a particularly niche area of law to practice for both legal practitioners and the Court. There are conflicting ideologies in the discretionary nature of the Family Law Act 1975 (Cth) and the commercial nature of the Bankruptcy Act 1966 (Cth). Therein creates the practical and academic difficulty for dealing with bankruptcy issues in family law matters.

In family law property proceedings, there is a settled approach to determine how matrimonial (or de facto) property interests will be adjusted in the event of separation. In our earlier blog, we discussed in detail the process for determining the division of property in a family law property settlement.

In this blog, we are going to elaborate on the process and discuss how bankruptcy will affect the division of property.

A brief summary of the steps to determining a property settlement is as follows:

  1. Firstly, the Court must identify the party\’s legal and equitable interests, both their individual and joint property. This means preparing a balance sheet that identifies all the assets, liabilities and financial resources, whether owned by you, your former spouse or owned jointly, everything goes on the balance sheet;
  2. Secondly, the Court must consider the contributions to the acquisition, conservation and improvement of the assets including financial and non-financial contributions, and homemaker and parent contributions;
  3. Thirdly, the Court must consider any future needs factors for each of the parties pursuant to Section 75(2) of the Family Law Act 1975 (Cth), which include but are not limited to each party\’s age and state of health, their income, property and financial resources, their physical and mental capacity for appropriate gainful employment and whether either party has the care and control of the children of the relationship under the age of 18.
  4. Lastly, to consider whether any proposed adjustment would be just and equitable to both parties to the proceedings in a global sense.

If a party to the proceedings declares bankruptcy before or during the family law property proceedings, the outcome of any adjustment between the parties becomes significantly complicated by the fact that the bankrupt party\’s property becomes vested in the trustee of the bankrupt estate, and then too the Court\’s duty is expanded to consider the creditor\’s interests in any property adjustment proposed to be made between the parties.

In 2005, the landscape of the intersection between family law and bankruptcy drastically changed with the introduction of the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth). The way in which the Court viewed the contributions by the non-bankrupt spouse in competition with the interests of the creditors vastly changed in removing the priority interest of the creditors and creating an even playing field for the interests of all parties to the proceedings.

As it currently stands the default bankruptcy period is three years and one day. From a family law perspective, the biggest issue is the practical ability of the Court to determine and resolve a family law property matter within the term of bankruptcy.

QUICK TIP: if you are currently bankrupt, your Trustee will step in and negotiate on your behalf for certain aspects. You are unable to participate with regard to property (or portions of property, for instance, your share of the former matrimonial home) that has vested in the bankrupt estate. However, your superannuation is protected from bankruptcy and you can participate to negotiate the split of your superannuation interests, if applicable.

It is undisputed that the Federal Circuit Court of Australia and the Family Court of Australia are already under significant pressure with a serious lack of resources to keep up with the demands placed on the Courts.

For example, in the Sydney Registry of the Federal Circuit Court of Australia, matters are waiting between three to six months for their first court date, eight months for an interim hearing, and anywhere between three and four years for a final hearing depending on how many days the trial requires. If you are seeking an airport watch list order to stop your former spouse from fleeing the country with your child, it is unlikely your application will be heard within a week from filing.

For the person who is bankrupt, there are a few issues to consider:

  1. What do I do if I am contemplating or have separated from my spouse? Communication is key, you must talk to your trustee about this issue.
  2. What do I do if I am served a court application by my former spouse? It is imperative that you speak to your trustee in this instance. There are disclosure obligations in family law whereby, if your former spouse commences proceedings, they must formally notify the trustee of this act. The court must also be notified that a party is currently bankrupt (or a party to a Personal Insolvency Agreement). There are other disclosure obligations, including where a party is not yet bankrupt and there are creditors who may be disadvantaged by the proposed family law settlement, notice must be provided to those third parties too;
  3. If my former spouse, myself or we jointly apply for divorce, will this affect my bankruptcy? Divorce is separate from your property settlement. The only consequence relevant to you is that from the date of your divorce order, you then have 12 months to approach the court for orders to finalise your property settlement. If you do successfully obtain a divorce, it is imperative that you communicate this to your trustee as the expiry of the 12-month limitation period may have consequences for your bankrupt estate;
  4. If I am bankrupt and my trustee steps in for the property settlement, what about my children? You will hold autonomy to conduct negotiations with regards to the arrangements for your children. The trustee has no power or ability to intervene in this aspect of your family law matter; and
  5. What about child support? Child support is a separate issue to your family law property settlement. If the child support agency makes an assessment for you to pay child support, you must pay in accordance with that assessment.

Where a Bankrupt Estate is involved, there are a few issues to consider:

  1. Making an offer to avoid litigation? Due to the congestion of the Family Law Court it would be reasonable to expect the Trustee to take a commercial attitude and formulate an offer to settle the claim of the bankrupt estate in the Family Law proceedings. You should be aware that the Trustee will do this to not only save costs for the bankrupt estate in legal fees, but to serve the benefit creditors of the bankrupt estate by expeditiously resolving these issues to enable a timely dividend. Furthermore, it is important to note that a settlement offer by the Trustee of the Bankrupt Estate is potentially very dangerous as it can in effect be a loaded gun. An offer made before or during the litigation is called a Calderbank offer. This will set the Trustee up to make a costs application against the other side for them to pay his costs if the offer is rejected and the litigation results in a similar result to the amount originally offered by the Trustee.
  2. Is it important to disclose your family law proceedings to your Bankruptcy Trustee? You should be up front with your Bankruptcy Trustee. The Family Law Judge will expect you to be upfront and make this disclosure. If you do not, it may protract the Court proceedings and cause the judge to be annoyed with you and form an opinion that he cannot rely on what you say to be creditable. This could be detrimental to your outcome from the Family Law proceedings.
  3. Can you still participate in family law proceedings when you are bankrupt? Yes, but in a limited way. Superannuation and assets protected for your benefit under the bankruptcy legislation (assets that do not vest in your bankrupt estate) are treated as assets capable of adjustment in family law proceedings and it is only these assets that you can address and negotiate on. While as a bankrupt you cannot make submissions without permission from the Court in relation to your assets that vest in the trustee of your bankrupt estate, you can still freely engage the Court in relation to your superannuation and assets that are protected for your benefit under the Bankruptcy Act. Super-splitting is very common in family law and any adjustment made in relation to superannuation is accounted for in any overall adjustment assets in a global sense.
  4. Can a trustee bring an application under the Family Law Act 1975 (Cth)? Only a party to the marriage or de facto relationship can make an application. Once proceedings have started, the trustee can make an application, or be subject to an application, to be joined as a party to the proceedings; and
  5. Is there an initial timeline for the trustee to act? Once a trustee has been served a notice of the proceedings, they have 28 days to decide and formally notify the parties and the court as to whether or not they wish to participate in the proceedings.

The complex nature of bankruptcy in family law proceedings creates a myriad of obstacles to reach an outcome that could be considered just and equitable for all parties involved. It is becoming clearer that a \’one stop\’ approach for approaching these matters is not appropriate and each case must be assessed individually. Even though the sweeping amendments in 2005 sought to clarify the uncertain waters, we are still seeing the velocity of those changes in matters being determined today. It is important that you source a Trustee for your bankrupt estate that you can talk to as this will significantly improve your experience in your family law proceedings.

Next steps

We note that the content of this article is not intended to provide legal advice. It is general information only. You should not rely on it as legal advice. If you would like to discuss anything of interest or concern to you, please contact us. Nothing arising from the content of this article is intended to create a legal relationship between us and any reader. If you would like to obtain legal advice from Tim Nicholls on your family law circumstances or to instruct him to act in your family law proceedings, call Understanding Bankruptcy and we will organise for Tim Nicholls to make contact with you.