Property settlements where one party is bankrupt

The Court is empowered under Section 79(1)(b) of the Family Law Act to make such order as it considers appropriate in the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the marriage, altering the interests of the bankruptcy trustee in the vested bankruptcy property.

When a spouse becomes bankrupt, it remains to their Trustee in Bankruptcy to “step into their shoes” in respect of the property settlement. Section 79(1)(c) and (b) indicates that the Court can make such orders that it considers appropriate including an order for a settlement of property in substitution for any interest in the property; and an order requiring either or both of the parties to the marriage; or the relevant bankruptcy trustee (if any); or to make, for the benefit of either or both of the parties to the marriage or a child of the marriage, such settlement or transfer of property as the court determines.

In the recent case of Morrison & Jepson & Anor heard in the Federal Circuit Court of Australia, the Court exercised its power to deal with vested bankruptcy property. The husband had become bankrupt prior to the property settlement and the Court balanced the needs of the creditors against the needs of the wife.

The parties had married in an overseas country which was omitted in the court transcript for privacy reasons. The parties subsequently moved to Australia. There were two children to the marriage. After the birth of the two children, the husband’s father died and the husband received a substantial amount of money from his father’s estate. These estate funds were used to purchase a property from the wife’s father.

The parties later travelled back overseas and lived there for several years before again returning to reside in Australia. The husband returned to the overseas country some time later and called the wife while overseas to inform her that he was not returning to Australia and that he was separating from her. Two weeks after calling the wife, the husband remarried in the overseas country. The children were left in the wife’s care in Australia.

The father instituted both property and parenting proceedings. Prior to the property settlement between the parties being resolved, the husband filed a debtor’s petition in bankruptcy and trustees in bankruptcy were appointed.

The wife claimed that the husband owned substantial property in the overseas country. There was only one substantial asset in Australia being the former matrimonial home. The wife also claimed that the husband inherited substantial assets from his mother’s estate. The wife’s legal representative submitted that the husband had walked away from the marriage with a comfortable lifestyle and the wife was left in Australia with the two children. One of the children of the marriage had behavioral difficulties.

One of the overseas properties was to be the family home and the wife obtained a valuation on the property. This property was included in the asset pool with 50% ownership by the husband. The Judge also found that whilst the wife asserted that the husband owned property overseas, she was unable to prove this assertion to the required standard of proof. The valuation relied upon by the wife did not provide any form of Certificate of Title identifying the owners of the property or any secured mortgages over the property. The Judge found that even if the wife were able to prove that the husband owned the property, it was unlikely that any order could be made by the Court under either the Family Law Act 1975 or the Bankruptcy Act 1996 that could be enforced in the overseas country.

The Judge decided that whilst the husband had contributed much more financially to the marriage, the wife supported the children both financially and emotionally and maintained the former matrimonial home without any assistance from the Husband. The wife made substantial contributions to the welfare of the family including contribution in the capacity of homemaker and parent both before and after the parties separated. The Court found that the wife’s contributions were at least equal to those of the husband.

The Court balanced the needs of the creditors against the needs of the wife. The Court found that as the husband had become bankrupt and filed the debtor’s petition in Australia, the husband should be responsible for the trustees’ costs and these costs should come from his entitlement of the division of property.

The trustees in bankruptcy sought $135,500 to pay the debts. This was calculated to be 16.87% of the net asset pool in Australia leaving 83.13% for the wife to retain. The Court found that this was a fair distribution.

Given the wife was unable to immediately pay $135,500 to the trustees, she was given about four years to pay it. The Court found it was not just to make the wife pay the amount immediately or be forced to sell the home.

Where a court finds that there is a need to alter the ownership of assets in a property settlement, to achieve a fair and equitable division, the Court then needs to address how that division is to be approached.

Property settlements under the Family Law Act generally involve a four step approach taking into account any assets and liabilities, both financial and non-financial contributions made by the parties, the future needs of the parties and the orders made must be “just and equitable”. Deciding what assets and liabilities form part of the pool of assets used in a property settlement can be a difficult task. The Courts have broad powers under the Family Law Act in relation to all types of assets including those that form part of bankruptcy property.

Before coming to any agreement privately, it is essential that you seek advice from a lawyer to ensure that what you have agreed to is on par with your entitlements under the Family Law Act and what you would be likely to receive if the matter proceeded to Court determination.