The Bankrupt Marriage Break-Up


When bills come in,  love goes out.  Family lawyers see this prophecy become reality for many Australian families. And they have seen it at unprecedented rates since the GFC.  So what happens when, in the context of family breakdown,  one spouse is bankrupt asks Dan Bottrell.

The bankruptcy of one spouse means that the other party to the family law matter will not be the bankrupt spouse; it will be their Trustee in Bankruptcy. The litigants, and participants in any negotiations, are the non-bankrupt spouse and the bankruptcy trustee, standing in the shoes of the bankrupt spouse. The bankrupt spouse is largely ‘sidelined’, only able to be heard in relation to the adjustment of non-vested bankruptcy property, such as superannuation, and any property owned by the non-bankrupt spouse.

This bankruptcy gives rise to a ‘contest’ between two parties, each advocating for fundamentally different interests. The non-bankrupt spouse is seeking to ‘claw back’ from the bankrupt estate property which has been accrued during the relationship with the bankrupt spouse, and in so doing, to recoup contributions which have been made by them, and additionally provide themselves with capital sufficient to take account of their circumstances. This may involve the responsibility for the care and financial support of children, or an inability to support themselves due to ill-health or an inability to secure paid employment. Meanwhile, the bankruptcy trustee is seeking to ensure that, for the ultimate benefit of creditors, the bankrupt estate is not eroded by the claims of the non-bankrupt spouse.

Limited legal guidelines

Unfortunately there is limited guidance for Judicial Officers in either the Bankruptcy Act, or the Family Law Act. Family law provides simply that the Court must take into account the impact of any property settlement order on the ability of any creditor of the bankrupt spouse to recover its debt. No ‘priorities’ (whether in favour of creditors, or non-bankrupt spouses) are specified. The final assessment is left to the discretion of the Trial Judge in each individual case, based on its unique circumstances.

The difficulty for non-bankrupt spouses and Trustees alike is that this lack of guidance makes results unpredictable. When a non-bankrupt spouse commences a claim, or a bankruptcy trustee resists a claim, they will not know whether the Trial Judge will determine that a needy spouse and children should prevail, or whether creditors should be protected. The stakes are high, as there is usually insufficient property to achieve both of these objectives.

Arguments seen for the non-bankrupt spouse often centre around claims that the unsecured creditors took a voluntary risk in trading with the bankrupt spouse, and that this risk disentitles them in the ‘balancing’ of interests which must occur when a non-bankrupt spouse and children are involved, particularly where there is no culpability on the part of the non-bankrupt spouse. Arguments advanced by a bankruptcy trustee are often that a marriage is a ‘rollercoaster’ in which spouses share ‘highs’ and ‘lows’ (such as insolvency) together, or that a non-bankrupt spouse was complicit in or had knowledge of the activities of the bankrupt spouse which brought about the bankruptcy, and/or has benefited as a result of those activities – arguments most often seen where bankruptcy has arisen from tax evasion (and where the bankrupt and non-bankrupt spouses have been able to enjoy a superior ‘lifestyle’ during that period).

Balancing act

In practice, the unpredictability of this ‘balancing exercise’ means that many disputes resolve out-of-court, as a result of an agreement reached between the non-bankrupt spouse, and the bankruptcy trustee, with only a small portion of such matters ever seeing the inside of a courtroom. These compromises, often involving ‘discounts’ to each parties’ claim, are designed to hedge risk for each party.

If you are in the midst of a family law matter, and either you or your spouse is facing bankruptcy, see a specialist family lawyer to take advice as to your options, and the projected outcomes of those options. This will assist your decision making, and see your interests protected in the meantime. Your family lawyer can also involve an insolvency practitioner to examine your situation, isolate whether there are options to avoid bankruptcy, and examine strategies which could otherwise advantage you. Importantly, this advice will put you in a position where you can approach a bankruptcy trustee (whether your own, or your spouse’s) with a settlement proposal.

Dan Bottrell is a partner with Jones Mitchell Lawyers

The contents of this article are not intended to be a complete statement of the law on any subject and should not be used as a substitute for legal advice in specific fact situations. Jones Mitchell cannot accept any liability or responsibility for loss occurring as a result of anyone acting or refraining from acting on any material contained in this interview.

Business First is a peer-to-peer magazine: written by CEOs and other high level executives, with interviews with some of the country’s best leaders.

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