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Bankruptcy and the Family Court

Sometimes in Family Law Act proceedings, one spouse (now including de facto partners) is, or becomes, bankrupt.  Since 2005, the Family Court and the Federal Magistrates’ Court have had the power to determine bankruptcy matters relating to a bankrupt spouse in family law proceedings.  This helps avoid the expense of running two cases in separate Courts and the unfair nature of the trustee in bankruptcy and the non-bankrupt spouse rushing to their respective Courts to try to beat the other there.

The Family Court has been willing to give a non-bankrupt spouse some credit for their financial contributions to a marriage, even if the net debts are greater than assets.  However, when the debts become too big, the non-bankrupt spouse usually has to suffer some of the losses, along with the creditors.

In one recent case, Trustee of the property of G Lemnos and Lemnos and Another, the husband held a $4.5-5 million home in his own name with a $2.4 million mortgage (for which the wife was a guarantor).  He owed the Australian Tax Office (ATO) $5.7 million due to past improper claims for tax deductions.  There were no other significant assets.

The Trial Judge ordered that the wife retain half of the property’s net value after payment of the mortgage (but not subject to the ATO debt).  In other words, she would retain property to the value of about $1-1.3 million, and the creditors would retain the same amount.  The Trial Judge considered the wife had not been party to her husband’s dishonest tax claims.  The Trustee in Bankruptcy appealed the decision.

On appeal, the Full Court of the Family Court emphasised the wife taking “the good with the bad”.  Justice Coleman pointed out that the Trial Judge’s decision meant the creditors received less than a quarter of their $5.7 million in entitlements, whilst Mrs Lemnos received almost 100% of the value of her contributions to the marriage.  He said this was not necessarily in accordance with the legislation.  The Trustee in Bankruptcy’s appeal was successful and the matter was ordered to be reheard by a different Judge.

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