If you are facing bankruptcy and you own a home you need to read this article very carefully to see how it will affect you and your spouse (if you own it jointly with your spouse).

How will your mortgage be affected in bankruptcy?

The first thing you need to know is if you declare bankruptcy it may not immediately impact your mortgage however if you fail the keep the mortgage repayments up to date the mortgagee will in most cases take steps to repossess the property. If your mortgage repayments are up to date, there is no reason why your bank or financial institution would take active steps to repossess your home. However you need to consider what action your Trustee in Bankruptcy will take if you have equity in the property.

How is the equity in your home calculated?

If you have equity in the property, then your Trustee in Bankruptcy will most likely take steps to realise that equity. Under Australian bankruptcy laws the equity in the property vests with the Trustee. The equity is calculated as the value of the property less the amount owed to the mortgagee on the property.

What happens if you own the property jointly with your spouse?

If you own the property jointly with your spouse then typically the equity will be split 50/50 with the other joint owner. In this situation the Trustee in Bankruptcy can only seek to realize the equity which belongs to the bankrupt person. Let’s look at an example to illustrate. Let’s assume the property is worth $250,000 and the mortgage registered against the property is $200,000. The total equity in the property would be $50,000. Let’s further assume that the property is owned by a husband & wife as joint tenants (ie on a 50/50 ratio basis) and the husband files for bankruptcy with credit card debts of $75,000. In this example the Trustee in Bankruptcy for the husband will seek to realize the husband’s equity in the property being $25,000 (50% of the $50,000 equity). This is the maximum amount that the Trustee in Bankruptcy can seek to recover to satisfy the husband’s credit card debts of $75,000.

Can the non-bankrupt spouse save the home?

Using the above example the non-bankrupt spouse could offer to purchase the equity from the Trustee in Bankruptcy for $25,000. If this offer was accepted the non-bankrupt spouse (ie the wife) would need to raise funds of $25,000 to pay the husband’s Trustee in Bankruptcy. This could be achieved by approaching the current mortgagee and borrowing an additional $25,000 to purchase the husband’s equity in the property. Please note that the mortgagee’s consent would be required to register the transfer on title and this may be problematic unless the non-bankrupt spouse can prove that they can afford the repayments themselves (given the bankruptcy of the other spouse).

It is important to note that any sale will need to be negotiated using market values. Market values are determined by obtaining a valuation from a registered property valuer.

What happens if there is no equity?

If there is no equity in the property (ie the mortgage is more than the value of the property) and the bankrupt wishes to keep the property then the Trustee in Bankruptcy may not take immediate steps to sell the property. If the bankrupt elects to keep the house and continues to pay the mortgage payments and the value of the house later increases, the Trustee in Bankruptcy has up to 6 years after the bankrupt is discharged from bankruptcy to sell the house and realize the equity (Sec 129AA(3) of the Bankruptcy Act). So if someone goes bankrupt today and there is no equity in the property and the bankrupt elects to continue to pay the mortgage and the property later increases in value, then the Trustee in Bankruptcy has up to 6 years from the time that the bankrupt is discharged from bankruptcy to sell the house and realize the equity. Furthermore the Trustee in Bankruptcy has the option to extend out this period to a future date by issuing a notice to the bankrupt under Sec 129AA(5) of the Bankruptcy Act. The Bankruptcy Act does not appear to place a restriction on Trustee with nominating a future date, so in theory it could be an indefinite time period.

Bankruptcy is complicated and for that reason you should only seek advice from a Registered Trustee in bankruptcyor a suitable qualified and experienced solicitor who practices in the area of bankruptcy. The Australian Bankruptcy Service has a registered Trustee on site and can assist today.

If you or your spouse are contemplating bankruptcy and you want to understand how bankruptcy is likely to affect your family home, then call us today on 1800 462 767 to discuss your options. Our toll free telephone line is open 24 hours everyday / 7 days a week.

All calls are free, entirely confidential and if required, anonymous.