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The Law and You: Bankruptcy and property settlement

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What happens with debts in a family law property settlement?

What happens if your partner becomes bankrupt? How does this affect your settlement?

This column shares information and tips on how to handle debts and a property settlement. It’s an important topic and you’ll want to seek expert legal advice so you understand your rights and your position.

What does the Court consider?

In a family law property settlement, the Court considers and values all assets, liabilities, superannuation and resources at settlement or at the date of the Court hearing. Debts are included in the calculation of the net pool of assets that will be distributed between the parties. For example, if you and your partner both have a mortgage over your home, this mortgage is ordinarily included as a liability when calculating the net pool of assets available.

Are all debts included?

It’s not always straightforward to characterise some debts and decide whether they should be part of a settlement. Here are some examples:

  • Debts incurred after separation without the knowledge of the other party. This can be especially relevant if you and your partner have been separated for a long time, if you haven’t finalised the property settlement or if individual financial circumstances have changed significantly since you separated.
  • Debts incurred from paying legal costs.
  • Unpaid money you may owe the Australian Taxation Department.
  • Debts unlikely to be repaid, such as family loans.

My partner is bankrupt. Should I seek legal advice?

Definitely seek legal expert family law and financial advice if your partner (either in marriage or a de facto relationship) becomes bankrupt before or after you separate. You need to act quickly to try to protect your property rights.

What happens when my partner becomes bankrupt?

If your partner becomes bankrupt, all of their property becomes the property of the Trustee in Bankruptcy who may sell it to pay off their debts. Generally, this includes all property, such as the family home. Some items are excepted, such as superannuation and minor items such as furniture, tools or an inexpensive car.

What can the Family Court do?

The non-bankrupt partner may be able to apply to the Family Court or Federal Circuit Court to intervene and prevent all property from becoming the property of the Trustee. The Court could decide that you should receive the property, before any of the creditors.

It’s also possible to apply for a Court Order for an annulment of the bankruptcy.

The Court has the power to weigh up whether the debts of your bankrupt partner should outrank your interests as the non-bankrupt spouse. Neither have priority over the other; it’s up to the Judge to determine the competing rights.

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