Fact Sheet

by Shaw Gidley04.08.20

When we enter into a personal partnership, either by marriage or defacto, the focus (rightly) is on all the positives of sharing a life with someone you love. However, with this level of relationship comes an amount of responsibility for the other person in terms of the financial situation they bring to the table. Sometimes this is a positive contribution (savings, assets, reliable financial management), and sometimes it’s a more complex contribution. For example, when bankruptcy enters the equation. 

  • What does it mean for your partner if you become bankrupt? 
  • Are they responsible for the debt? 
  • Does it affect their credit rating? 
  • Does it undo their good credit history for the future?

There are a few factors to consider, that all affect them (and you) in different ways depending on the scenario. 

Scenario: I was bankrupt before we became a legally recognised relationship

Declaring bankruptcy before you and your partner are married or become de facto has about the same considerations and concerns for your partner’s future as it does when you are already married or defacto. The main difference is that in this case, your partner’s income does not come into the equation through the bankruptcy process (see below scenario). Becoming bankrupt before you enter into a legal relationship is not a null and void in its significance to your partner’s future, however, your bankruptcy will affect your chances of obtaining joint loans and credit, meaning your partner might be required to carry the debt in their own name, leaving you both financially vulnerable.    

Scenario: I am facing bankruptcy

Regarding the liability of a partner, the biggest question from those who are facing bankruptcy is, ‘Will my partner be responsible for paying my debts?’. The short answer is, no. Even on the cusp of bankruptcy, a third party is not forced to be responsible for payment of your debts, despite the legal relationship in place. However, if you are in the process of declaring bankruptcy, you will be required to submit the income of your partner to ensure that you are not unfairly overextending your own share in household finances. The Trustee in Bankruptcy will need to identify and decipher if your contribution to expenses is reasonable, or if some of it should be going toward your debt repayments.

Scenario: I have recently declared bankruptcy

Declaring bankruptcy is a big decision, but one that is often vital to ensure you can continue on with your life without the heavy burden of unpayable debts. If you are married or in a de facto relationship, your personal bankruptcy does not affect the credit rating of your partner in terms of their ability to successfully apply for loans and credit etc. if their own credit history is in the black. However, this is not to say your partner will not be affected by the bankruptcy. The path to bankruptcy is usually paved with some asset loss, exhaustion of funds and a detriment to your credit health, so if they use an asset (such as a house or car), you gifted or sold them an asset, share a debt or co-own an asset, they may experience the same loss.  

Scenario: I still have assets with my ex-

What happens if an ex partner files bankruptcy? Divorcing from marriage or separating from a de facto partner who has gone bankrupt may still affect your ex partner, especially if you still have joint assets. It can become quite complex if children are involved, too, and the Family Court can become another party to the bankruptcy process. However, as a broad directive if you are in this situation, your ex is able to make an injunction application to the court regarding assets (including property) that you shared. The application prevents the Trustee from distributing assets before the matter is settled in Court, where the outcome will give you and your ex much greater clarity on your positions throughout the bankruptcy process.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.