Economic uncertainty following the COVID-19 pandemic has placed significant financial strain on families, leading to an increase in bankruptcies.
When bankruptcy intersects with family law, proceedings often become complex and contentious. If the matrimonial home has equity, a tug-of-war between the non-bankrupt spouse and the trustee is likely to ensue.
The Powers of the Family Court and Federal Circuit Court
The Federal Circuit and Family Court of Australia (FCFCOA) have jurisdiction under the Bankruptcy Act 1966 to handle matters related to property settlements, child support and spousal maintenance proceedings.
What are the options available to the non-bankrupt party in relation to the family home?
Once the bankrupt spouse files for bankruptcy, their assets immediately vest with the trustee. If the matrimonial home vests with the trustee, the non-bankrupt party will likely pursue an injunction application with the court, delaying the sale of the property. They may also seek a share in the bankrupt spouse’s vested assets.
Much to the frustration of creditors, the Family Court can apply the same considerations as outlined under the Family Law Act 1975, regardless of whether one spouse is bankrupt. The welfare of children is a significant consideration.
What is the key question before the court?
The key question is whether it is just and equitable to alter the parties’ existing interests. In determining this, the court considers the parties’ financial and non-financial contributions, as well as their future needs. This is a complex process, dependent on the unique circumstances of each case.
Do creditors or the non-bankrupt spouse have priority?
Neither the bankruptcy trustee (on behalf of creditors) nor the non-bankrupt spouse has automatic priority. While the court can consider the impact of a proposed order on creditor rights, outcomes are often inconsistent and difficult to predict.
The takeaway
The Family Court has broad discretionary authority to resolve family law disputes which involve bankruptcy, with significant flexibility to re-adjust the interests of different parties.
