Bankruptcy as a Weapon in Family Law

My mother always said there was no place for firearms in the home. Rather than acting as a defensive tool, the risk is too high that a gun gets into the wrong hands and the wrong person gets hurt.

Ok, a crude analogy and not well quoted. Perhaps the sledgehammer to crack a nut is closer to the mark, but either way our office is seeing a spate of bankruptcies initiated by debtors seeking to:

  1. Avoid matrimonial liabilities or at least cap them out; and
  2. Achieve a split of jointly held matrimonial assets (house equity) without having to incur the out of pocket costs and timeline associated with the Family Court.

In each of our three recent files, the:

  • debtor (also referred to as the bankrupt) had petitioned their own bankruptcy via the government office and the Official Trustee (AFSA) transferred the estate to me as a Private Trustee i.e. I had not met the bankrupts before the bankruptcies so no advice/recommendation was obtained from me around this strategy;
  • unsecured debts were under $30k but there was also a mortgage to be serviced;
  • share of house equity estimated by the bankrupts at less than $100,000 and each was increasing on the back of rising house prices.

Where property is jointly held, it is the practice of most Trustees to confer with the non-bankrupt spouse as to their interest, if any, to acquire the bankrupt estate’s share of the equity in a home. It’s often a sensible way for the rest of the family to keep a roof over their head, avoiding removalist costs, stamp/transfer duty and financing costs in the event that the family is able to support a new bank application for funding (without relying upon the bankrupt’s income for application purposes) that would apply to a new property purchase.

Much as the starting points were similar, the outcomes were quite different.

Back to the outcomes:

In the first case, the non-bankrupt ex-spouse (NBES) was not supportive of a timely market sale and intended to oppose any application to the court seeking orders for sale. After conferral about a number of disputes between the parties (including insurance claim proceeds), she did however agree to purchase the equity through a payment plan involving some upfront amount and the balance over 36 monthly payments. The costs of the estate were exacerbated ($60k+ incl trustee and legals) by a range of complexities including interests in numerous deceased estates. The bankrupt has been discharged from bankruptcy but his estate is continuing.

In the second case, the NBES did not engage on my house equity correspondence and absent repayments toward the mortgage, the bank took possession of the house and achieved an excellent sale outcome. We kept our costs to $15,000 for the year that we were involved, overseeing payout of the creditors’ claims, annulled the bankruptcy and paid a surplus of over $60,000 to the former bankrupt including a reimbursement to her by the NBES for funds she had put into improving the home and an extra contribution to support their child’s maintenance. A great result from humble beginnings.

In the third case, the NBES was agreeable to a sale of the house and he even put in the extra effort to prepare it for sale to achieve an optimal sale result. That sale has just settled in the last few days and preliminary indications are that the bankruptcy will be annulled in the next fortnight with a surplus in the vicinity of $80,000 payable to the debtor (former bankrupt) i.e. after Trustee costs of approximately $20,000.

On balance, two out of three is arguably a pretty good outcome, though the points remain that:

  • bankruptcy, even when initiated through the government office, is not necessarily a free service and may indeed end up being more costly than engaging a lawyer and working through the issues in the Family Court (if needed);
  • Bankruptcy Trustees may be able to achieve a more timely and less costly outcome, but the reality is that these cases turn on their facts; critically how the NBES engages.

If you have a situation where you would like to explore bankruptcy to deal with debt and also potentially as a means to achieving an asset split, please reach out to your local SV Partners office to discuss what is possible but also the potential pitfalls. Engaging professional advice early on can save a lot pain down the track.

Article written by Malcolm Field (Director) – Perth

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