Bankruptcy & the Family Home

 

For many people facing bankruptcy, one of their first concerns is what will happen to the family home. Unlike some household property, a bankrupt’s interest in real estate is not generally protected from creditors simply because the property is their principal place of residence.

However, bankruptcy does not necessarily mean the family home will immediately be sold. What happens will depend on matters including who owns the property, the amount of equity in it, any mortgage or other secured debt, and whether a co-owner is able to purchase the bankrupt estate’s interest.

 

What happens to the family home when you become bankrupt?

 

Under the Bankruptcy Act 1966 (Cth), most property belonging to a bankrupt at the commencement of bankruptcy vests in their bankruptcy trustee, subject to certain exceptions.

A bankrupt’s interest in their family home is generally not an exempt asset. This means that if the bankrupt owns all or part of the home, their interest in the property will ordinarily vest in the trustee.

The trustee is responsible for identifying and realising assets available to the bankrupt estate for the benefit of creditors. Where there is sufficient equity in a family home, this can ultimately result in the trustee seeking to realise the bankrupt’s interest.

This does not mean that the trustee simply becomes entitled to the entire property where another person also owns it. The bankrupt’s interest and the interests of any non-bankrupt co-owners need to be considered.

 

What if the family home is jointly owned?

 

The bankruptcy of one owner does not automatically make the solvent co-owner’s interest available to the bankrupt’s creditors. However, the trustee can seek to realise the bankrupt’s interest in the property.

Where property is owned as joint tenants, bankruptcy can sever the joint tenancy in relation to the bankrupt’s interest. The bankrupt estate and the other owner will then generally hold their respective interests as tenants in common.

This distinction can be important because it allows the trustee to deal with the bankrupt’s interest separately from the interest of the solvent co-owner.

 

Does bankruptcy mean the family home has to be sold?

 

Not necessarily.

Where there is a solvent co-owner, a trustee will commonly consider whether that person wishes and is financially able to purchase the bankrupt estate’s interest in the property.

Broadly, the available pathways may include:

• the co-owner purchasing the trustee’s interest;
• the co-owner and trustee agreeing to market and sell the property together; or
• where an agreement cannot be reached, the trustee taking legal steps to seek a sale of the property.

The appropriate course will depend on the value of the property, the secured debt, the bankrupt’s interest and the circumstances of the co-owner.

 

Can a spouse buy the bankrupt’s share of the family home?

 

Potentially, yes.

Where the bankrupt owns the family home with a solvent spouse, partner or other co-owner, that person may be given an opportunity to purchase the bankruptcy trustee’s interest.

This can provide a way for the property to remain with the solvent co-owner rather than being sold on the open market. However, the trustee has duties to the bankrupt estate and its creditors and will ordinarily need to obtain appropriate value for the interest being transferred.

The trustee may therefore obtain a valuation and consider the equity available in the property before determining the amount required to acquire the estate’s interest.

A transfer for substantially less than the value of the estate’s interest cannot simply be agreed because the purchaser is the bankrupt’s spouse or another family member.

 

How is equity in the family home calculated?

 

The trustee will usually obtain information about the property’s value and the debts secured against it.

At its simplest, equity is the difference between the property’s value and the secured liabilities affecting it. For example, if a home is worth $800,000 and the mortgage is $500,000, there is $300,000 in gross equity before considering relevant costs and other matters.

That does not necessarily mean a trustee is automatically entitled to $150,000 where the bankrupt and their spouse are registered as equal owners.

The legal and beneficial ownership of the property may need to be considered, together with mortgages, other interests and the circumstances in which the property was acquired and funded. The precise amount available to the bankrupt estate can therefore be more complicated than simply dividing the apparent equity according to the names recorded on the title.

 

What if there is little or no equity in the family home?

 

A lack of equity can affect whether it is commercially worthwhile for a trustee to seek an immediate sale.

If the secured debt is close to or exceeds the property’s value, selling the home may produce little or nothing for the bankrupt estate after relevant liabilities and costs are taken into account.

However, this should not be taken to mean that the trustee’s interest in the property has disappeared.

A trustee may retain an interest in property after the bankrupt has been discharged from bankruptcy, subject to the provisions of the Bankruptcy Act concerning the vesting and revesting of property. If the property increases in value, that can become significant.

Accordingly, a bankrupt should not assume that discharge from bankruptcy automatically means the family home is no longer affected.

 

Can the bankruptcy trustee force the sale of a jointly owned home?

 

Where the trustee and co-owner cannot agree on how the bankrupt’s interest will be dealt with, the trustee may seek orders through the Court to enable the property to be sold.

Depending on the circumstances, this can include seeking the appointment of statutory trustees for sale.

 

What happens to the mortgage during bankruptcy?

 

Bankruptcy does not simply extinguish a mortgage over the family home.

A mortgagee is a secured creditor and generally retains its security rights. Mortgage repayments and the lender’s rights therefore need to be considered separately from the bankruptcy trustee’s interest in the bankrupt’s equity.

Where repayments are not maintained, the mortgagee may have its own rights to take possession of and sell the property, irrespective of the trustee’s position.

This is one reason why assessing the family home in bankruptcy requires consideration of both the bankruptcy regime and the rights of secured creditors.

 

Can you transfer the family home before bankruptcy?

 

Transferring the family home to a spouse, partner, relative or another person before becoming bankrupt does not necessarily protect it from a future bankruptcy trustee.

The Bankruptcy Act contains provisions allowing trustees to investigate and, in certain circumstances, challenge transactions entered into before bankruptcy. This can include certain transfers for less than market value and transfers intended to defeat, delay or hinder creditors.

The applicable rules and time periods depend on the nature and circumstances of the transaction.

 

Does discharge from bankruptcy protect the family home?

 

Discharge from bankruptcy and the trustee’s ownership of property are separate issues.

A person is generally automatically discharged from bankruptcy after the applicable bankruptcy period, although that period can be extended in some circumstances. Discharge releases the bankrupt from many of the restrictions associated with being bankrupt, but it does not necessarily return property that has already vested in the trustee.

This can be particularly important where a family home was retained during the bankruptcy because there was little equity at the time.

The fact that the trustee did not sell the property before discharge should therefore not, by itself, be interpreted as confirmation that the trustee no longer has an interest in it.

 

Contact Us

 

If your family home may be realised due to bankruptcy and you would like to know more, contact us at Bambrick Legal today. We offer a free, no-obligation 30-min consultation for all enquiries.

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Related Blog – I’m Bankrupt! Will This Affect My Employment & Income?