How to manage joint debts and assets during bankruptcy

What is this resource?

This resource covers:

• What is bankruptcy?

• How does bankruptcy affect my partner?

• What happens to joint debts?

• What happens to joint assets?

• Links to further resources

It’s a common myth that if one partner goes bankrupt, the other one must as well. That’s not true. Bankruptcy affects your spouse if:

• they use an asset you own

• you sold or gave them an asset prior to going bankrupt

• you share a debt with them

• you co-own an asset (such as a house or car).

What is Bankruptcy?

Bankruptcy is a legal process through which you are declared unable to pay your debts when they fall due. You may file for bankruptcy (voluntary bankruptcy), or alternatively, creditors can apply to have you declared bankrupt. If you are declared bankrupt by either of the above means, you will be removed from managing your own money and assets, and a trustee will be appointed to manage your money and assets.  

To understand the ways in which bankruptcy may affect you, please read our factsheets on the ‘Consequences of Bankruptcy’ and ‘Bankruptcy and the Family Home’.

The purpose of this fact sheet is to explain what will happen to your joint debts and assets when you, a co-owner or a joint debtor become bankrupt.

What does a trustee do in bankruptcy?

Once a trustee has been appointed, they will take the following steps to repay your outstanding debts:

1. Repay your secured debts

Secured debts are debts backed or secured by property or other assets, such as:

• a mortgage (secured by your home) and

• a car loan (secured by your vehicle).

The specific assets that secure your debts will be sold. The proceeds of sale will then be used to repay the respective debts. If there is money left over after your secured debts have been repaid, the trustee will use this money to pay your unsecured debts.

2. Repay your unsecured debts

Unsecured debts are debts not secured by an underlying asset, such as:

• credit card debt,

• medical bills, and

• utility bills.

If you have unsecured debts which have not been paid, the trustee will sell other assets that you own to repay these debts (see section on unprotected assets).

In addition, the proceeds of sale from your assets may be used to satisfy interest repayments on your loans and other fees (for example, those charged by your bank), including late payment or termination fees.

How can your bankruptcy affect your spouse?

Your bankruptcy may affect your spouse if:

• they use an asset that you own

• you sold or gave them an asset prior to declaring bankruptcy 

• they share a debt with you (for example, a mortgage, a car loan or a utility bill) 

• you and your spouse jointly own an asset (for example, a home, a car or other personal property)

Does your spouse use an asset that you own?

Before your assets can be sold, the trustee must determine whether you own the asset, or whether ownership lies with your spouse.

This is important because:

1. The trustee appointed to manage your assets cannot recover an asset owned by your spouse.
2. If the trustee finds that you own certain assets, some of these assets maybe protected in bankruptcy and cannot be sold.
3. All other unprotected assets that you own will form part of your assets which can be sold during your bankruptcy.

To determine whether you or your spouse owns the asset, the trustee will:

• ask you about contributions to the purchase price of the asset,

• check the asset’s use and history,

• look at whose name is on the loan documents (if applicable), and

• in the case of certain assets such as a car, check the the Personal Property Securities Register (PPSR) to determine whether a secured loan has been taken out against the asset.

Ultimately, the trustee will establish ownership depending on the facts of your case.

Did you dispose of an asset prior to bankruptcy?

Before filing for bankruptcy, people may give away or sell an asset to their spouse for a price below the market value of the asset. For example, a person may sell the family home to their spouse for $250,000 when the market value of the home may be $500,000. If you find yourself in this situation, the trustee may investigate your dealings with your assets and, in the circumstances outlined below, may be able to reverse these transactions to recover the assets you disposed of. 

What if your spouse is also entering into bankruptcy?

Bankruptcy is a legal status attributed to individuals. However, if couples have substantial joint debts, it may make sense for both partners to file for their individual bankruptcy at the same time if neither can service the joint debts alone.

This will involve submitting separate bankruptcy documentation for each person, and all joint debts and joint assets must be listed in full in the relevant documents.

What happens to joint debts?

What happens to joint debts when one individual is made bankrupt?

If one joint debtor enters bankruptcy, the other joint debtors will become responsible for repaying the entirety of the debt. For example, if two people share a mortgage, and one becomes bankrupt, the non-bankrupt debtor will become responsible for repaying the mortgage.

However, if the debt is guaranteed by another person (known as a guarantor), they will become responsible for that part of the debt which they have agreed to guarantee.

What happens to joint assets

Co-ownership means that more than one person has contributed money to purchase an asset. For example, if two people contribute money to buy a car, the car is a joint asset. However, if only one person contributes their money to the purchase of the car, the car is not a joint asset.   

Protected assets

Not all assets that you own or co-own with another person will be affected in bankruptcy. Certain assets are protected and cannot be sold by a trustee to satisfy your debts. This means that if you are made bankrupt, you will be able to keep these assets. 

Unprotected assets

All other assets not listed in section 4.1 are unprotected assets which can be used by the trustee to satisfy your debts. On bankruptcy, these assets may be sold by the trustee.  

If an unprotected asset is also a joint asset, part of the sale proceeds from the sale of that asset by the trustee must be given to the non-bankrupt co-owner in accordance with the proportion of their share in the asset. For example, if there are two co-owners of an asset, and each contributed 50% of the purchase price, then the non-bankrupt co-owner will be given 50% of the proceeds of sale of that asset. 

Unprotected assets include:

• tools of trade where your share has a value exceeding $3,9503 (this amount will change according to the CPI/base pension rate)

• vehicle(s) where your share in accordance with the calculation in section 4.1 above has a value exceeding $8,5504 (this amount will change according to the CPI/base pension rate)

• money held in shared bank accounts

• shares

• valuable items, for example, jewellery and handbags (wedding/engagement rings may be protected). 

Additional resources

Further reading

For further information on bankruptcy, visit:

• Australian Financial Security Authority, I am currently bankrupt

• Australian Financial Security Authority, What can be taken or sold in bankruptcy?

• Australian Financial Security Authority, Indexed Amounts.

• Bankruptcy notices, creditors petitions, sequestration orders, consequences of bankruptcy. 

Relevant legislation

• Bankruptcy Act 1966 (Cth)

  • Section 116
  • Section 120

• Bankruptcy Regulations 2021 (Cth) 

  • Regulation 25