Saving the Family Home in Bankruptcy

Did you know that bankruptcy can often be used to save your family home? In fact, personal bankruptcy might be the only way to save your family home if you have significant unsecured debts such as credit card debts and personal loans.

What is the Effect of Bankruptcy on the Family Home?

A bankrupt’s interest in any property vests with the Bankruptcy Trustee by operation of the Bankruptcy Act. What this means is that the bankrupt can no longer deal with their interest in a property in any way and the Bankruptcy Trustee has full control over the bankrupt’s share. As such, if a property is 50% owned by a bankrupt, it is the role of the Bankruptcy Trustee to deal with that 50% interest.

Who Can the Bankruptcy Trustee Sell the Bankrupt’s Interest to?

If a property is jointly owned (i.e. the bankrupt owns 50% and the non-bankrupt spouse owns the other 50% interest), the Bankruptcy Trustee can offer the bankrupt’s 50% interest to the non-bankrupt spouse or another family member. The Bankruptcy Trustee will typically obtain a registered valuation of the property and details of the current mortgage balance to determine the value of the bankrupt’s interest in the property.

It is commonplace for a Bankruptcy Trustee to sell the bankrupt’s interest a property to the non-bankrupt spouse or another family member. The advantages of this approach are as follows:

• It avoids the unnecessary stress of a forced sale of the matrimonial home in bankruptcy; and
• The bankrupt estate enjoys a higher return as selling costs can be avoided.

Example

Paul and Anne are married. Paul is self-employed and has significant personal taxation and credit card debts of approximately $100,000 that he can no longer afford to service. Anne has minimal personal debts.
Paul and Anne jointly own their family home that is currently valued at $500,000. The mortgage secured against this property is $450,000 and all payments are up to date. The equity in Paul and Anne’s property is therefore $50,000.

Paul has decided to file for personal bankruptcy and is concerned that the family home may be lost. Paul’s 50% equity in the property is worth $25,000 and it is this asset that the Bankruptcy Trustee has a claim against. Anne’s 50% equity in the property, also worth $25,000, is not an asset of the bankrupt estate and does not fall under the control of the Bankruptcy Trustee.

In order to save the family home, it is possible for Anne to offer $25,000 to the Bankruptcy Trustee to purchase Paul’s 50% interest. If this offer is accepted by the Bankruptcy Trustee, Anne would then own 100% of the property.

In this case, the family home can be saved and does not need to be listed for sale due to Paul’s bankruptcy.

What to do Next?

If you or your spouse are contemplating bankruptcy and jointly own a home, please telephone us today on 1800 462 767 to discuss your options.