Questions often arise about how the Family Law Act applies when one of the parties to a marriage or relationship is a bankrupt or becomes bankrupt following separation but before a property settlement has been finalised.

Once a person is declared bankrupt under the provisions of the Bankruptcy Act 1966, the provisions of same apply to the Bankrupt.


Bankruptcy is a legal financial status under the Bankruptcy Act 1966. Once a person is declared bankrupt, a number of things happen including:

  • A Trustee in Bankruptcy is appointed to manage the bankrupt’s affairs; a Trustee “steps into the shoes” of the bankrupted person and makes all major financial decisions thereafter;
  • The bankrupt’s property (there are exceptions including certain household goods, some personal property, a motor vehicle up to a certain value, property held in trust for somebody else, superannuation) vests in the Trustee in Bankruptcy for sale and division among the creditors;
  • Creditors (secured and unsecured) can no longer enforce or chase the debt;
  • Assets that the bankrupt acquires during the period of bankruptcy (eg. an inheritance) may also be sold by the Trustee in Bankruptcy;
  • At the end of the bankruptcy period, the bankrupt will be discharged and released from most of the remaining debts and the bankrupt can start again with a clean sheet.


If one of the parties in the marriage or relationship is a Bankrupt, the Family Court also has jurisdiction to deal with any matter connected with the Bankruptcy of that party.


  • In 2005, amendments were made to the Bankruptcy Act and the Family Law Act, designed to clear up and sort out the competing interests of the Bankruptcy Trustees (representing creditors) and the non-bankrupt spouse (often the spouse who knew little about his/her spouse’s financial dealings).

As a result, Family Law Courts (Section 79(1)(b) of the Family Law Act 1975) can now alter the interest of the Trustee in Bankruptcy in “vested bankruptcy property”. The Court can order the Trustee to transfer property for the benefit of the non-bankrupt spouse or a child of the marriage.

  • As between the Trustee in Bankruptcy and the non-bankrupt spouse, the Court can only make a property alteration in one direction, ie. in favour of the non-bankrupt spouse.

This means the Trustee cannot ask the Court to seek to take money from the non-bankrupt spouse in an attempt to swell the pool available for creditors.

  • When a Court is trying to sort out the competing interests between the Trustee in Bankruptcy and the non-bankrupt spouse, the Court has to carefully identify and weigh up the bankrupt spouse’s and non-bankrupt spouse’s existing legal and equitable interests in the matrimonial property. Then the Court requires to work out what the non-bankrupt spouse can keep or receive and what must stay with the Trustee in Bankruptcy as vested bankruptcy property for creditors.
  • When the Family Court is working out what Orders are appropriate:
    • The Court cannot allow any creditors to be joined into the proceedings;
    • The Court must join the Trustee in Bankruptcy however, into property settlement proceedings (on behalf of the creditors) if the Court thinks the interests of creditors will be affected by the Court making property settlement Orders as between the spouses;
    • The Court must take into account the effect of any proposed Orders on the creditor’s ability to recover their respective debts;
    • The Court can, for example, set aside a transfer of a property by the bankrupt spouse to the non-bankrupt spouse if it was made within 5 years of the start of the bankruptcy and seen to have been an attempt to defeat creditors.

The legal and equitable complexities arising where family law and bankruptcy clash are considerable and fraught with difficulty. Whether you are the bankrupt spouse, the non-bankrupt spouse or a disgruntled creditor, your interests must be properly protected.