I’m broke, baby: bankruptcy and the right to litigate family law proceedings
It is not uncommon for you and your former partner to find yourself in tight financial circumstances following separation. You, or your partner, may well feel like you are broke. But what happens when things go beyond being broke?
The recent Family Court decision of Sloan & Sloan looks at how proceedings are affected when one spouse (whether married or de facto) becomes bankrupt after proceedings are commenced in the Family Court.
What is Bankruptcy?
Bankruptcy is a legal process which takes place when a person cannot pay their debts as and when they fall due. It is governed by the Bankruptcy Act 1966 (Cth). Upon bankruptcy, a trustee is appointed by the Australian Financial Security Authority to manage the bankrupt estate and manage any assets and payments to creditors.
In Sloan & Sloan, the husband became bankrupt during proceedings for parenting and property orders. The issue was whether or not the husband could continue with his application, which he brought before becoming bankrupt.
Bankrupt’s property and right to litigate
Section 58 of the Bankruptcy Act 1966 (Cth) provides that the husband’s property (being any asset owned by him) held at the time of bankruptcy and during the period of bankruptcy, vests in the trustee. The definition of property which applies under the Bankruptcy Act does not extend to all rights to litigate.
Bankruptcy in the Family Law Act
Sections 79 and 90SM of the Family Law Act 1975 (Cth), which deal with the alteration of property interests after the breakdown of a marriage or de facto relationship, provide for the involvement of the bankruptcy trustee in litigation to the extent that the litigation involves vested bankruptcy property. It is not uncommon for family law proceedings to involve the bankruptcy trustee as a party, and for property settlements to effectively be negotiated (or litigated) between the trustee and the non-bankrupt spouse.
Rights of action which do not pass to a trustee
The Full Court of the Family Court in the matter of O’Neill stated a bankrupt spouse may initiate and prosecute proceedings for property orders during the course of bankruptcy, however pursuant to s58(1)(b) of the Bankruptcy Act 1966 (Cth), any property acquired would vest in the trustee (save for a limited class of exempt property).
In Sloan & Sloan, Gill J stated that the right to litigate family law property proceedings does not vest in the trustee because such a right is personal to the bankrupt, except where the proceedings affect the quantum of the bankrupt estate.
Practically speaking, this means that while a bankrupt spouse may commence proceedings under the Family Law Act, any property settlement obtained by the bankrupt party will become the property of the bankruptcy trustee and be applied to meet their debts.
Section 60 of the Bankruptcy Act – stay of legal proceedings
Section 60 of the Bankruptcy Act 1966 (Cth) provides that civil legal proceedings commenced by someone who then becomes bankrupt are stayed until the trustee advises of a decision in writing regarding whether the action will be prosecuted or discontinued.
If the trustee has not made this election within 28 days of receipt of notice of the action from the other party to the proceedings, the trustee is deemed to have abandoned the action. This is why many family law matters which involve a bankrupt party involve the trustee as a party to the proceedings – this is effectively a means for the trustee to secure property from which to satisfy debts.
Gill J noted in Sloan & Sloan that the “unwelcome” consequence of s 60 of the Bankruptcy Act 1966 (Cth) was that family law proceedings relating to parenting were also stayed in the event of bankruptcy due to the “blanket effect” of the provision.
Sloan & Sloan was adjourned and the trustee was eventually joined as a party to the proceedings and directed for the parenting and property proceedings to continue.
Whilst s 60 of the Bankruptcy Act 1966 effectively stays parenting proceedings, the trustee does not become involved in the parenting proceedings – the parenting proceedings continue to be litigated between the parents only.
My former partner is about to be declared bankrupt – what do I do?
If you become aware that your former partner is about to be (or has recently been) declared bankrupt, this may have a significant impact on your property proceedings and/or settlement. It is important that you obtain legal advice as soon as possible as to your options and how to minimise any impact on you.
Swaab’s family law team can provide you with specialist legal advice about the impact of bankruptcy on your family law matter.