What happens to superannuation in bankruptcy?

If you go bankrupt, could your superannuation in bankruptcy be at risk?  Could your bankruptcy trustee make a claim to your superannuation?

Below we clear these questions up and explain various scenarios that could affect you if you go bankrupt.

Is superannuation “Divisible property”

When someone goes bankrupt, their bankruptcy trustee can recover or sell any assets that are considered divisible property.

What is and what isn’t divisible property is set out in the Bankruptcy Act.

A bankrupt’s superannuation is generally not considered divisible property and is not available to a bankruptcy trustee.

But the question of what happens to superannuation in bankruptcy is not simply black and white. 

When can a bankruptcy trustee make a claim to superannuation?

It is sometimes the case that people facing bankruptcy make unwise decisions. They may look at ways of protecting or quarantining their assets, in an effort to avoid losing them.

For instance, they may make payments into their superannuation fund, on the understanding that superannuation funds are generally not considered divisible property in bankruptcy.

However, if payments are made to a bankrupt’s superannuation fund they may be recovered: if the funds transferred would have formed part of the (future) bankrupt estate if the transfer had not been made and the main purpose of the transaction was to keep the asset from creditors.

The main purpose of the transaction is deemed as keeping the asset from being available to creditors if, at the time of the transaction, the person making the payment was insolvent.

If a transfer to a superannuation fund was not made by the actual person who later becomes bankrupt, but it was made on their behalf (for instance, by a third party who holds assets belonging to the person or owes money to them), these funds may also be recovered by the trustee on a similar basis as to that set out above.

Ordinarily, the type of transaction targeted by a trustee for recovery is a significant lump sum payment into a debtor’s superannuation fund in the period immediately preceding the date of bankruptcy, when the debtor was insolvent.

A bankruptcy trustee cannot use these provisions to recover superannuation payments made in the ordinary course of a person’s employment. 

What happens if you obtain funds from superannuation prior to bankruptcy?

If you have taken funds out of your superannuation fund before bankruptcy and you still hold them in your bank account at the time of bankruptcy, the funds will be considered divisible property and you will have to pay any funds still held to your trustee.

This includes both funds taken out as a lump sum and as a pension.

What happens if you obtain funds from superannuation after bankruptcy?

After bankruptcy, if you receive a pension from your superannuation fund, amounts received are considered income for the purposes of income assessments in bankruptcy.

Accordingly, if amounts received (plus any other income) exceed the relevant threshold for income assessment purposes then you will have to pay 50 percent of all after-tax income received over the threshold to your bankruptcy trustee.

If superannuation is received after bankruptcy as a lump sum, it is not divisible property and you can keep the funds. These funds are not subject to income assessment provisions.

Protect your superannuation n bankruptcy 

Are you facing bankruptcy and concerned about risks to your superannuation fund?

We can help you assess whether or not a claim can be made against your superannuation and provide advice on how to deal with your superannuation in bankruptcy.

Please get in contact with us for a free, no obligation discussion as soon as possible.

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