Legal Tip 249: Liability of Spouses on Bankruptcy

Legal Tip 249: Liability of Spouses on Bankruptcy


Under Australian law spouses are separate legal persons to each other. This means that each spouse is generally not liable for the debts of the other spouse. This is not the case in some countries where the parties to a marriage might be considered as one unit for bankruptcy purposes.

I say ‘generally’ because in some cases the bankruptcy of one spouse can drag the other spouse’s assets into things. This is especially the case where finances of the spouses are mingled and assets bought with combined money, even though only one of them becomes the legal owner.

Bankruptcy can also affect jointly owned assets as the share of the bankrupt will fall into the hands of creditors with the trustee in bankruptcy becoming a legal and/or equitable owner with the non-bankrupt spouse. This often results in a forced sale.


Example

Homer and Marge had combined finances into one big savings account and have bought an investment property jointly as Joint Tenants. They also have shares which were purchased in Marge’s name only, for tax reasons.

Homer’s business “Mr Plough” has failed, and he becomes bankrupt.

Their main residence is owned by Marge solely, and she had purchased the house prior to meeting Homer using her own money. This is likely to be safe from creditors, but they could still have a crack at taking half.

The jointly owned property will be under attack. The joint tenancy will be severed with each of Homer and Marge now owning as tenants in common in equal shares with the trustee in Bankruptcy stepping into Homer’s shoes and becoming an owner in his place. They might then offer Marge the opportunity to buy out Homer’s share, at market rates, with the money used being passed to creditors (after the high fees for the trustee are taken out). If Marge cannot afford to buy Homer’s share it is likely the trustee in bankruptcy will force a sale of the property by getting a court order. Marge will get her share of the sale after all costs.

Marge’s shares are probably not safe either as Marge hasn’t earned any money in 20 years and these shares were essentially purchased with Homer’s money. It is likely the Trustee will try to claim 50% of these shares for creditors – perhaps more even.

So, Homer’s bankruptcy will affect more than just him.