The 2005 amendments to the Family Law Act brought far-reaching changes to the interaction of family law and bankruptcy. There have however been few decided cases under the new legislation.
Justice LePoer Trench delivered a decision on the 30th August 2007 in a matter of Lemnos and Lemnos  Fam CA 1058. Here the court was dealing with the former matrimonial home which had vested in the trustee and which had a net equity of some $2.4M. The husband had a debt to the ATO of about $5.7M. This being the first matter determined under Section 79(1) (b) of the Family Law Act, His Honour concluded “that the amendments require me to consider this case in the usual manner adopted for consideration of Part VIII property applications with exception that I am to treat all of the former property of the husband now vested in the trustee as available for distribution to the wife if that an appropriate result.”
His Honour concluded that the contributions of the wife to the equity in the former matrimonial home should be assessed as equal at the date of trial. He also concluded that the husband’s tax debt which he had incurred between 30 June 1990 and 30 June 2002 by incorrectly claiming as deductible expenses all of the interest and outgoings in respect of the former matrimonial home should be satisfied from the husband’s own resources.
His Honour stated, “I have some concern with the outcome of this case in so far as the creditor principally to lose out in this case is the Australian Tax Office and therefore the tax payers of this land. The question should realistically be asked why the wife should ultimately prosper at the expense of the public purse. The answer so far as I am concerned is that the Family Law Act as now standing provides for that to be the outcome in appropriate cases. The legislation does not elevate the status of creditors to a ranking above the other consideration s which the Court is required to consider under section 75(2). In the circumstances of this case therefore the result which sees the wife receive half of the equity in the W property and the prestige motor vehicle is just and equitable.”
In a matter of Witt and Witt delivered 20 September 2007 cited as  FMCA fam 681 the husband and wife were respectively 51 and 54 years old. They had commenced to cohabit in 1983, married in October 1996 and finally separated on 22 December 2004. The marriage produced seven children between 1984 and 1992 of whom the three youngest children remained living with the wife.
At the date of separation and substantially at the date of trial the assets consisted of the former matrimonial home with a net value of $108,000 and a $4,000 motor vehicle. There was a Centrelink debt in the amount of $14,584 and an RACV Finance debt in the husband’s name in the amount of $8,122. It was the latter debt, which the husband had failed to service despite working since separation which resulted the husband’s being made bankrupt on 29 August 2006.
The wife sought a 95% adjustment in her favour of the non-superannuation assets and a splitting order in the same percentage in respect of the superannuation assets which totalled $59,000.
By the time the matter came to hearing, the trustee’s position was that the amount required to pay out the husband’s bankrupt estate was not less than $69,000 – associated with the initial debt of $8,122.38 were $13,500 in petitioning creditor’s costs, $25,750 in legal fees and $17,568.25 for the trustee’s remuneration and disbursements. The Federal Magistrate observed: “Those costs constitute a large portion of a very small asset pool.”
Federal Magistrate O’Sullivan observed that “The court was not pointed to authority that required the interests of the trustees by way of recovery of their remuneration and other costs be taken into account, only the interests of the creditors.”
He declined to take the costs of the trustees into account in determining the pool to be divided.
The court ordered that the wife receive the entirety of the interest in the former matrimonial home subject to the mortgage debt, that she refinance that debt, that she indemnify the trustees in respect of and be responsible for the RACV finance and Centrelink debts and that the superannuation be split 95% in her favour.
Before proceeding with any proceedings in the Family Court it is important to note the approach taken in previous cases and some anomalies.
Creditors may be parties but not creditors who have proved in the bankruptcy.
The bankrupt remains a party but does not get to make any submissions in relation to the vested bankruptcy property unless there are exceptional circumstances. There seems to be no case law as to what might rank as exceptional circumstances in this area.
The bankrupt can address the court and call evidence in relation to the orders that might be made with respect to property (such as superannuation) that does not vest with the Bankruptcy Trustee.
Although the bankrupt cannot make submissions in relation to vested bankruptcy property the trustee can make submissions in relation to property which has not vested as between the bankrupt and non-bankrupt parties. This may way for the trustee to stave off an attack on the vested bankruptcy property i.e. to submit that it is preferable in balancing the interests of the non-bankrupt spouse and the bankruptcy creditors to compensate the non-bankrupt spouse out of the non-divisible property rather than out of the vested bankruptcy property.
Mark Shera Accredited Family Law Specialist, SJP Law with thanks to Rob Hamwood Barrister.