Earlier this week the Federal Court made clear that assets purchased by a bankrupt from his or her exempt income vest automatically in the bankruptcy trustee.

Under bankruptcy legislation, bankrupts are allowed to earn (and keep for themselves) a certain amount of “exempt income” during bankruptcy. However, the legislation also says that any assets acquired by a bankrupt during bankruptcy are forfeited to the trustee. So what happens if a bankrupt uses exempt income to buy assets?

This question was examined by the Federal Court this week in Di Cioccio v Official Trustee in Bankruptcy (as Trustee of the Bankrupt Estate of Di Cioccio) [2015] FCAFC 30. Mr Di Cioccio, a bankrupt, had saved up his exempt income and used it to buy shares.

The court gave the shares to the trustee, observing that if a bankrupt uses exempt income to acquire assets, the assets are “after-acquired property” and they immediately vest in the trustee.

Moral of the story: A bankrupt should save up exempt income, or use it to pay living expenses. The moment it is used to acquire non-exempt assets, the trustee gets them.

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