It’s becoming increasingly common that parents provide financial assistance to their adult children to purchase real property. In the unfortunate event that their adult children were to later be declared bankrupt, how can parents protect their interests in that property? And can parents keep the property within the family?
When a person is declared bankrupt, he or she loses control of their assets to their trustee in bankruptcy (except for those which are exempt pursuant to relevant provisions of the Bankruptcy Act 1966 (“the Act”). The assets may be sold by the trustee for the benefit of the bankrupt estate. This is what it means when trustees in bankruptcy say the bankrupt’s assets “vests” in them and that they will “realise” the assets for the benefits of creditors.
Unfortunately, the family home or any other real property owned by a bankrupt doesn’t normally fall within the “exempted assets” category and therefore it “vests” in the Trustee of Bankruptcy upon his or her bankruptcy.
There are a number of options parents may consider to protect their interest in their children’s property (i.e. funds advanced for the purpose to purchase the real property). These include the following:
Parents may consider lodging a caveat over the real property to protect their own interest. A caveat is a legal document lodged to provide notice of a legal claim to a real property. So long as a valid caveat remains registered on a title, no other transactions can be registered against the title until the caveat is resolved.
However, please note that not just any creditor can lodge a caveat over real property owned by the debtor. This can only be validly done by someone who has advanced money to the registered owner and the owner has granted a caveatable interest to the lender over that property. It is therefore recommended that parents engage lawyers to prepare a formal funding or loan agreement to be entered with their children to ascertain their caveatable interest, then prepare and lodge a caveat accordingly with the land title office.
|Market Value of the Property||$500,000|
|Money owing to Mum||$100,000 (protected by valid caveat)|
Pursuant to s116(2)(a) of the Act, the property held by the bankrupt in trust for another person is exempted and does not vest in the bankruptcy trustee.
This means that if children merely hold the legal title of the property on trust and the parents have the actual beneficial ownership of the property, the property may not vest in the bankruptcy trustee in the event of bankruptcy. However, it is crucial that this arrangement is properly documented at or before the time of the purchase of the property. Again, it is recommended that a lawyer be engaged to prepare the relevant agreement for both parents and children to sign.
What if there was no formal agreement entered and a property has been bought by parents in the name of their children? Parents may wish to speak to a lawyer who is specialised in trusts and have a trust agreement prepared and executed as soon as possible. Parents may wish to consider the abovementioned first option by lodging a caveat over the property to protect their interests in the property.
The property is protected from creditors and stays within the family.
The two scenarios above are typical scenarios where contemporaneous records were kept:
Due to the lack of evidence (i.e. no documentary evidence showing the parents advanced funds to the son to purchase the house, no written agreement between the parents and son evidencing the trust, no other documentary evidence showing the intention of a trust at the time of purchasing the house), the property vests in the bankruptcy trustee and the trustee proceeded to sell the house.
Generally speaking, more often that it is too late once a bankruptcy process starts to keep property owned by the bankrupt away from the trustee in bankruptcy. It is therefore recommended measures, like the ones suggested above, are taken to protect family interests in real property when it is first acquired. Finally, seek assistance from qualified legal professionals.
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