Bankruptcy and the family home

It is a common misconception that if an individual is bankrupt and they own their home, their house will be sold by their bankruptcy trustee. Given that for most people their home is their most valuable asset, it is important to consider the following options bankrupts have for keeping the family home during their bankruptcy. As discussed below, keeping the family home depends on who owns the property, the amount of equity in the property and the stance of any mortgagees and/or caveators.

Pursuant to Section 116 of the Bankruptcy Act 1966 (Cth), a bankrupt’s home is divisible property i.e. it is not a protected asset. After the commencement of the bankruptcy and before either a bankrupt’s discharge or until dealt with by the trustee within 6 years from the date the bankrupt disclosed the property, the bankrupt’s property vests in the trustee. If there is any equity in the property, the bankruptcy trustee has a duty to realise the property (Section 19(b) and (f) of the Bankruptcy Act). In its simplest form, equity equals:

Market value of the property

Less amount owed to mortgagees(s) and caveator(s) listed on Title

Less selling costs

The following scenarios need to be considered when dealing with a bankrupt’s family home:

Bankrupt is the sole owner of the property with no mortgage i.e. unencumbered property

Trustee to sell the property at market value.

The bankrupt’s property is jointly owned and the co-owner is not bankrupt

There are various options to realise the Estate’s interest in the property. Only the bankrupt’s share of the property vests with the Trustee. The non-bankrupt co-owner’s share of the property is not an asset of the bankrupt estate. Despite this, the co-owner will not be able to deal with the property without the Trustee’s consent.

The co-owner can do one of the following three options:

Option 1: Make an offer to the Trustee to purchase the Estate’s equitable interest in the property (generally the more viable option if there is minimal equity)

When deciding whether to accept the offer from the co-owner, the following needs to be considered:

  • The Estate’s equitable interest in the property
  • A discount for selling costs i.e. no costs of sale as not a sale on the open market.

After the sale to the co-owner by Deed of Transfer, the co-owner needs to do the following:

  • Continue paying the outgoings of the property; it is not the trustee’s liability to pay these.
  • Pay stamp duty on the transfer.
  • Register the transfer of title (the trustee can do an updated Land Title search though)

Option 2: Cooperatively work with the Trustee in selling the property on the open market. The bankrupt’s share of the net proceeds would go to the Bankrupt Estate. The non-bankrupt’s co-owner’s share of the property would receive their share of the net proceeds as their interest in the property is not an asset of the bankrupt’s bankruptcy.

Option 3: If the co-owner and the Trustee cannot come to an agreement, the Trustee or co-owner can apply to the court for an order to obtain vacant possession and sale to sell the property. It should be noted that significant costs would be incurred with this option. As in option 2, the proceeds of the sale will be split between the trustee and the co-owner.

In the next edition we will discuss further about Bankruptcy and the family home.