Divorce and bankruptcy: when creditors become involved

Separation can become significantly more complicated when one party is bankrupt or experiencing financial difficulties. Bankruptcy does not prevent a person from resolving family law issues; however, it can affect how property settlements are dealt with and may involve the bankruptcy trustee.

What happens when a person becomes bankrupt?

When a person becomes bankrupt, control of their property generally transfers to the bankruptcy trustee. The trustee's role is to identify and deal with assets available to creditors.

This means that a bankrupt person may not have complete control over certain assets, including property that may otherwise have formed part of a family law property settlement.

The interaction between bankruptcy law and family law can be complex because the interests of the bankrupt person, their former spouse or partner, and their creditors may conflict.

Does bankruptcy prevent a property settlement?

No. Parties can still negotiate or seek property settlement orders after one party becomes bankrupt.

However, the bankruptcy trustee may need to be involved, particularly where the property settlement affects assets that are available to creditors.

The Court may need to consider:

• whether assets are available to the bankruptcy trustee;
• whether the proposed settlement is fair between the parties;
• the interests of creditors; and
• whether the transaction is an attempt to defeat creditor claims.

What role does the bankruptcy trustee have?

The bankruptcy trustee may become involved in family law proceedings to protect the interests of creditors.

The trustee may:

• obtain information about the parties' financial circumstances;
• participate in property proceedings;
• challenge certain transactions; and
• seek to recover property for the benefit of creditors.

For example, if a person transfers valuable assets to their former spouse shortly before bankruptcy, the trustee may investigate whether the transfer should be set aside.

Can my ex's bankruptcy affect my property settlement?

Yes. A former spouse or partner may have intended to receive certain assets as part of a property settlement, but bankruptcy can affect whether those assets remain available.

The timing of separation, property settlement negotiations and bankruptcy can be very important.

For example, a property settlement reached before bankruptcy may be treated differently from one entered into after bankruptcy. Independent legal advice is important to understand the risks and available options.

What happens to the family home?

The family home is often the most significant asset affected by bankruptcy.

If the bankrupt person has an interest in the home, the trustee may have rights over that interest. This may create complications where the non-bankrupt spouse wishes to remain living in the property.

Issues may include:

• whether the property should be sold;
• whether one party can buy out the other's interest;
• whether the trustee can realise the bankrupt person's share; and
• how any equity should be dealt with.

What happens to child support if a parent is bankrupt?

Bankruptcy does not automatically cancel a parent's child support obligations.

A parent remains responsible for supporting their children, and child support debts are generally treated differently from ordinary debts in bankruptcy.

If a parent is unable to meet their obligations due to changed financial circumstances, they may need to seek a reassessment or variation through the appropriate child support processes.

This article is general information only and does not constitute legal advice. Every matter is different — speak with one of our family lawyers about your specific circumstances.

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