Bankruptcy and property settlements

About bankruptcy

Bankruptcy is a legal process where a person is declared unable to repay the money they owe. Bankruptcy involves giving up control of your assets and income to a trustee. The trustee will divide your assets to people you owe money to (creditors).

You can become bankrupt:

• voluntarily, by asking to be declared bankrupt, or
• involuntarily, by your creditors applying for you to be declared bankrupt.

For more information, see Bankruptcy.

Impact on your property and debts

If you or your ex-partner are declared bankrupt, a trustee will be appointed to manage the bankrupt person’s money and assets. Once a trustee is appointed, the bankrupt person is no longer in control of their assets.

What they trustee does with the assets will depend first on whether the property is protected or not.

Property that can used to repay the outstanding debts is known as divisible property. This includes things like:

• the family home and investment properties
• shares and cryptocurrencies
• savings.

It includes property the bankrupt person owns when they are declared bankrupt and property acquired during the bankruptcy. It is not protected from being used to repay the outstanding debts.

Protected property, also known as non-divisible property, can’t be used to repay the bankrupt person’s debts. It includes things like:

• a motor vehicle (car or motorbike) worth up to $9,400
• tools used to earn income (tools of trade) worth up to $4,350
• ordinary household items, such as, furniture, fridge and washing machine – this doesn’t include antiques
• superannuation held in a regulated superannuation fund and superannuation split under a property order
• property transferred under a spousal or de facto maintenance order
• property covered by property orders.

Family home

How a bankruptcy will impact your family home will depend on:

• who owns the property
• what type of ownership you have
• the value of your home
• whether you have a mortgage.

If you or your ex-partner are bankrupt and you own your family home together as joint tenants, your tenancy will be severed. You will become tenants in common and the trustee will own the bankrupt person’s share of the home.

If you and your ex-partner own your family home as tenants in common, the trustee will own the bankrupt person’s share of the property.

If there is equity in your home, the trustee will usually offer to sell the property to the non-bankrupt person. However, the trustee does not have a legal obligation to sell the property to the non-bankrupt person. They can refuse an offer, for example if it was not a reasonable offer based on the market value of the property, or if it came with conditions that were unacceptable to the trustee.

If the non-bankrupt person can’t or won’t purchase the property, the trustee will ask for their agreement to sell the property. If they won’t agree, the trustee can apply to a court for an order to sell the property. If the property is sold, the proceeds of the sale may be used to pay the mortgage first, and then sale costs. Any leftover money is then divided between the non-bankrupt person and the trustee. How these shares are distributed will be based on how ownership is divided, for example:

• if it is owned in equal shares, then the sale proceeds will be divided equally
• if it is owned in unequal shares, for example, 30% and 70%, the sale proceeds will be divided based on these percentages.

If there is a shortfall on the loan, meaning that the sale proceeds do not cover the mortgage, the non-bankrupt person can still be held legally responsible for the shortfall amount.

If your ex-partner owns the family home and is bankrupt, the trustee will transfer the title of the property into their name. This will give them control over the property and allow them to the sell the property to repay your ex-partner’s debts.   

If you are worried about losing the family home because of bankruptcy, you should get legal advice.

For more information, see What happens to my house? on the Australian Financial Security Authority website.

Superannuation

If your superannuation is held in a regulated superannuation fund at the date you are declared bankrupt, it is protected property. Even though it won’t be used to repay your debts, it will still be included in a property settlement.

Any superannuation you have in an unregulated fund is not protected property, and it can be divided amongst your creditors.

Any superannuation you are paid as income will be included in your assessable income.

Any money that you withdraw from superannuation as a lump sum during or after your bankruptcy is protected property. So are the assets you purchase with that money. While these assets can’t be claimed by the trustee, they will still be counted in a property settlement and can be divided by the court.

Any money you withdraw from your superannuation fund before you are declared bankrupt isn’t protected. Neither are any assets that you purchase with this money.  

You can’t be a trustee of a self-managed super fund if you are bankrupt. You must stop acting as the trustee of your fund and notify the Australian Taxation Office within 28 days. For more information, see Notify us of changes to your SMSF on the Australian Taxation Office website.

Debts

If you and your ex-partner have loans together, and one of you is declared bankrupt, the other person (non-bankrupt person) become responsible for repaying the whole loan.

If you are declared bankrupt and you have a guarantor for your loan, the guarantor is responsible for repaying the whole loan.

For more information, see What happens to my debts? on the Australian Financial Security Authority website.

Impact on your income

Being bankrupt doesn’t stop you from working and earning an income. There is no limit on how much money you can earn while you are bankrupt. However, if you earn above a certain amount, you will have to pay part of your income to the trustee. This is called an income contribution.

The trustee will assess how much money you must pay in contributions. When calculating your income, the trustee won’t include any child support or maintenance that you receive from your ex-partner.

If your ex-partner is bankrupt, the trustee can only use their income to repay their debts. The trustee will only use your ex-partner’s income when assessing their income contributions – your income won’t be counted.

For more information, see Income and employment on the Australian Financial Security Authority website.

Pre-action procedures

You don’t have to follow the pre-action procedures if you or your ex-partner are bankrupt. However, you should still try to make a genuine attempt to resolve your property dispute before applying to the court for property settlement orders.

For more information, see Pre-action procedures in property cases.

Financial disclosure

You and your ex-partner still have a duty to provide full and frank financial disclosure when resolving a property dispute. Specifically, you must disclose any information that relates to your bankruptcy case, or possible bankruptcy.

The trustee is also required to disclose the information and documents in their possession that are relevant to the issues in your case. The trustee doesn’t have to use their powers to investigate your financial circumstances to find information or documents to disclose to the court.

For more information, see Financial disclosure in property cases. 

Applying for property orders

The Federal Circuit and Family Court of Australia can deal with the bankruptcy when hearing a case about:

• a property settlement
• a declaration of property interests
• setting aside property orders
• spousal or de facto maintenance
• enforcing property or maintenance orders.

Both you and your ex-partner can apply for property orders, regardless of who has been declared bankrupt. The trustee can’t apply to the court for property orders. However, they can become a party to your case.

Once the trustee becomes a party, the bankrupt party can’t make submissions to the court about the property that the trustee has control over, except with the leave (permission) of the court. The bankrupt party can make submissions about protected property.

The trustee can apply to have property orders set aside.  

Notifying the other party and court

You must notify your ex-partner, the trustee and the court in writing if you have been declared bankrupt or have signed a personal insolvency agreement.

You must notify the trustee within seven days, or as soon as practicable, and provide:

• a copy of the Initiating application, Response to initiating application and other court documents, and
• the date, place and time of the next court event.

You must notify the court within seven days, or as soon as practicable after you becoming a party in the property case and tell the court the date and place of the next court event in your bankruptcy case.

Trustees and creditors

The trustee doesn’t immediately become a party to a property settlement case. However, they must be joined as a party if:

• you or your ex-partner are declared bankrupt before or during your case, and
• the trustee applies to become a party to the case
• the court is satisfied that the interests of the creditors may be affected by any property orders that are made.

A creditor can apply to be a third party in your case. They can apply to have an order set aside it if would prevent them from recovering a debt that you or your ex-partner owe.

Property orders

As with other property cases, the court must first be satisfied that it is just and equitable for it to make property orders.

If it is satisfied, the court will then follow the usual process for determining what orders to make. First, it will identify and value the property of your relationship. Next, it will consideration the contributions you and your ex-partner have made to the property. After that, it will consider any current or future needs that you and your ex-partner may have. And finally, it will consider what orders are just and equitable in the circumstances.

The court will have to assess the competing rights of the trustee and the non-bankrupt party, and decide which rights take priority. There are several factors the court will take into account during this process, including:

• the likely impact of proposed orders on the rights of creditors
• the financial circumstances of the non-bankrupt party
• the effect of any proposed orders on the non-bankrupt party
• whether either party failed to meet their duty to provide full and frank financial disclosure
• whether the bankrupt party has tried to hide assets from the trustee.

The court can make a number of orders, including:

• transferring property from the bankrupt party to the non-bankrupt party
• transferring property from the trustee to the non-bankrupt party.

Binding financial agreements

A binding financial agreement (BFA) won’t stop the court from making orders about your property in a court case between you or your ex-partner and the bankruptcy trustee. As such, you can’t use a BFA to hide or protect your property from bankruptcy.