Filing for bankruptcy when you’re married or are in a de-facto partnership can raise many valid questions. You have to understand the financial as well as legal ramifications of this decision in order to take the most appropriate steps for your financial situation.
This article will help you understand your basic obligations and the consequences of filing for bankruptcy, how this affects your partner (and whether, indeed, it affects them at all), and what you’ll both need to disclose in order to make sure this process is as smooth and non-disruptive as possible.
Bankruptcy — What Is It?
The Australian Financial Security Authority defines bankruptcy as a legal filing or declaration that an individual cannot pay their debts. Also known as a state of personal insolvency, bankruptcy is an option that individuals can consider and must themselves initiate when they are trying to get a handle on unmanageable debt.
If and when you decide to instigate this, you’re essentially entering into voluntary bankruptcy, known as a ‘debtor’s petition’. However, this is just one of the options open to you under the Bankruptcy Act of 1966. Before you take this step, make sure to seek free financial advice on your next best course of action.
To be eligible for filing for bankruptcy, you must:
- Show that you’re unable to pay your debts when they are due
- Be present in Australia or have a residential or business connection within the country
However, there is no upper or lower ceiling on the amount of debt and there is no fee to apply for bankruptcy.
Filing for Bankruptcy When You’re Married
Let’s say that, in your marriage, you’ve managed to keep most of your finances separate. While there may be joint assets like a home or rental property, it’s only you having issues paying back your debt.
This is quite a common situation and, luckily, you can choose to file for bankruptcy as an individual. This would make your spouse the non-debtor. He or she is then considered the non-filing spouse. They simply will not be listed as a debtor, though it will be noted that you’re both married or a de-facto couple.
Filing as an Individual
When you, as an individual, are filing for bankruptcy, that state of personal insolvency affects you and you alone. This means that it will discharge only your personal debts — such as credit card debt, student loans, and store cards.
Now, when you file for bankruptcy as an individual, you’re released after 3 years and one day from most of your debts. Here’s the process for filing as an individual:
- Provide the full details of your debts, your income and your assets (including joint assets) to a trustee appointed by AFSA
- This trustee notifies your creditors that you’re bankrupt, which will prevent most creditors from contacting you about your debt.
- It’s under the trustee’s authority to sell certain assets that can help pay off your debts (such as vehicles, up to a certain amount).
- Following this, and depending on your income, you may be required to make compulsory payments
The good news is that, when you file as an individual, you’re essentially taking the responsibility on yourself. Your bankruptcy declaration will not affect your spouse’s credit rating, personal assets, debts, or income.
However, you’re both still married and so the ‘non-filing’ spouse will have to provide full financial details, including their income, their personal assets, joint liabilities and joint assets.
Why? Because these financial amounts provide a fuller financial picture of your marriage. And they’ll be used in making a determination as to the amount of compulsory repayments.
The cases in which an individual filing ‘affects’ the non-filing spouse are if and when the non-filing spouse:
- happens to be the guarantor of a debt,
- has a joint liability with the filing-spouse, or
- is a joint owner of property with the filing spouse
Filing as a Couple
If both you and your partner are filing for bankruptcy, you will both be required to complete the bankruptcy petition and submit separately. It is important to keep in mind that the details listed on one bankruptcy must mirror those listed on the other petition. The income listed on your bankruptcy must in turn be listed on your partner’s bankruptcy.
Possible Effects on Your Spouse
So what about the case where you file individually? How will this impact your partner financially?
Again, the non-filing spouse’s credit rating won’t be affected. Any jointly owned assets may be affected by you filing for Bankruptcy. It is important when considering bankruptcy to ensure that you have all the information possible to guarantee yourself that you are making the best decision possible. And it’s not axiomatically true that just because you both own a home together, your credit reports will reflect the other individual as a ‘joint’ file.
Whilst you filing for bankruptcy may not directly impact your partner in terms of their financial responsibilities, there are occasions when your partner may be affected. However, there are what we’ll call ‘satellite’ effects. While not directly affecting the non-filing spouse, they could definitely place some restrictions or be a hindrance overall. Let’s take a look.
Usually, joint accounts include any joint bank accounts you may have opened, as well as any joint loans, such as a home loan or a rental lease that is in both your names. It could also include any investment accounts that are jointly opened in both your names, or insurance policies taken out jointly, whose premium is paid for together.
According to the Legal Services Commission of South Australia, if you enter a contract as a ‘joint’ party, you are a co-borrower. Because of this, even the non-filing spouse is legally responsible for the whole amount (not just their ‘half’).
Applying for loans, rental leases
If the non-filing spouse is applying for credit or a loan, your filing will not automatically preclude them from being eligible or being awarded the loan. But, because you both live at the same address and you, under that address, have filed for bankruptcy, it may be difficult for them to obtain credit under that same address.
Similarly, co-owning a rental property with your non-filing spouse could get tricky if you file for bankruptcy. The non-filing spouse could have a competing claim over the co-owned property, versus the claims of the trustee/interests of creditors. It’s left up to the courts to decide on a case-by-case basis what happens to the property.
Running a business
Your declaration of bankruptcy is a major disruption to your business, especially if you operate alone or without your spouse as a partner. Legally, you:
- Cannot formally be a director or have any role in managing the company unless authorised by the court
- May be required to inform anyone you deal with in business that you have declared bankruptcy
To allow operations to continue, in this case, you may have to appoint a director in your stead. The trustee may also ask you to sell the business and put the proceeds towards your debts to your creditors.
Family holidays could get sticky: Your declaration of bankruptcy means that you can’t travel abroad or take a holiday without the express written permission of the trustee. You may have to surrender your passport, until the end of bankruptcy, which is usually 3 years and one day from the date of acceptance.
Weigh your options carefully
Remember to weigh your options carefully before filing for bankruptcy when you’re married. While a non-filing spouse is neither automatically responsible for nor held liable through a negative credit score for the filing-spouse’s declaration of bankruptcy, there are cases where they can, through association, end up being responsible for some part of that debt.
There are also family law considerations that give courts discretionary power over property, under the Bankruptcy and Family Law Legislation Amendment Act (“BFLAA”) in 2005, so make sure to seek legal counsel, financial advice or both.