FAMILY HOME IN BANKRUPTCY | what happens if one owner goes bankrupt?

Pursuant to section 58 of the Bankruptcy Act 1966 (“the Act”), where an individual becomes a bankrupt, his or her interests in any property “vest” in the name of the Bankruptcy Trustee. In other words, the Trustee takes control of a bankrupt’s interest in any house or property that he/she owns and the Trustee can sell it for the benefits of the bankrupt’s creditors.

It is not uncommon that a property, such as a family home, is jointly owned by the spouse/partner/family member(s) of the bankrupt. Generally, a Bankruptcy Trustee will take the following steps in order to realise a property:

  • Lodge a caveat over the property and/or transfer the title in the property into the name of the Trustee to protect the interests of creditors;
  • Obtain a valuation of the property and verify mortgages and/or any other security interests in the property;
  • Assess the equity available for the bankrupt estate and consider whether it is commercially viable to sell the property now or deal with it at a later time in the Administration;
  • Realise the equity (if it is deemed commercial to do so) and apply the amount realised to statutory charges, costs of realisation, the costs of the bankruptcy and make dividend payments to approved creditors; and
  • Remit any surplus back to the bankrupt, after the payment of all debts and costs of the bankruptcy.

Options available for the “non-bankrupt” owner(s) of the property

Whilst only the bankrupt’s share of interests in the property vest in the Bankruptcy Trustee, there are unfortunate impacts on other “non-bankrupt” owner(s) in respect to the jointly owned property. Other owner(s) may have the following options in these circumstances:

If the bankrupt arranges sufficient funds (commonly through family, friends and other sources, such as superannuation) to pay his/her debts and the costs of the bankruptcy in full, the bankruptcy will be annulled (i.e. end immediately). In this case, the bankrupt and other joint owner(s) will retain their interest in the family home. This option is worth considering, in particular at the early stage of the bankruptcy (when the costs of bankruptcy is relatively low) and if the total amount of the debts owed by the bankrupt is relatively small.

Pursuant to section 73 of the Act, the Bankrupt can make a proposal to his/her creditors for a composition in satisfaction of the debts. Similar to the first option, the “non-bankrupt” co-owner(s) may consider funding towards the composition proposal. If the proposal is accepted by the creditors of the bankrupt and terms and conditions of same are met (i.e. the agreed contribution is made and repaid to creditors), the bankruptcy will be annulled and property owners will retain their respective interests in the property.

This is the most cost-effective option for the “non-bankrupt” owner(s) to deal with the property subject to their financial and borrowing capacity. For example, a bankrupt and his/her spouse jointly own a family house that worth $1,000,000. The mortgage (also in joint names) over the property is $800,000. The total net equity of the family house is $200,000 ($1,000,000 less $800,000) and accordingly, the bankrupt’s 50% share in the equity is in the amount of $100,000. In this case, the spouse may consider offering $100,000 to purchase the bankrupt’s shares in the equity from the Bankruptcy Trustee.

If the “non-bankrupt” co-owner(s) is/are unable or unwilling to raise sufficient funds to either assist the bankrupt to annul the bankruptcy (option 1 & 2), or to purchase the bankrupt’s shares in the equity (option 3). The co-owner(s) may consider a joint sale of the family home with the Bankruptcy Trustee. The net sale proceeds (after the deduction of costs of sale, such as real estate agent’s commissions and marketing costs) will be distributed in accordance with the relevant percentage of interests to the bankrupt estate and other joint owner(s).

In the event that the co-owner(s) decline to consider any of the above options and parties are unable to reach an agreement, the Trustee may consider approach to the Court to have a Statutory Trustee for Sale appointed for the mandatory sale of the property. This is the least favourable option to the co-owner(s), considering the costs of any such application (both legal and statutory trustee’s costs) and the fact that co-owner(s) would have no control over the sale process.

Other information to consider by the “non-bankrupt” co-owner(s)

The bankruptcy of one owner of a family home will not have impact on the rights of any valid mortgagee. Accordingly, the mortgagee can take action to sell the property if the mortgage terms are breached. Whilst the bankrupt and other co-owner(s) may continue to occupy the property when considering the abovementioned options, it is important to note that they will be required to continue to meet the mortgage payments.

The Bankruptcy Trustee may not consider taking any actions to realise the bankrupt’s interests in the property if there is little or no equity in the property upon the assessment. However, pursuant to section 129AA of the Act, such interests remain vested in the Bankruptcy Trustee normally for a further six years after the date on which the bankrupt is discharged from bankruptcy. That means the Bankruptcy Trustee may still be able to sell the property many years after the discharge of bankruptcy.

The key takeaway for the “non-bankrupt” co-owner(s) is to consider the options available and take actions as soon as possible to minimise the inevitable impact of the bankruptcy, seek independent professional advice and keep open communications with the Bankrupt Trustee. The earlier the action is taken, the more options may be available to the co-owner(s) to deal with the jointly owned. It is in all parties’ best interests to deal with the property in a timely and cost-efficient manner.

Want to know more?

If you have any further questions about the issues raised in this article, please contact Henry McKenna, our Insolvency & Reconstruction Director, for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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