One of the first things that a bankruptcy trustee will do in a new estate is conduct a real property search to find out whether the bankrupt owns real property – either individually or as a co-owner. If a property is located, the trustee will do two things:
1. Determine if the property has any equity (by conducting a valuation and deducting any mortgages etc).
2. Determine the best way of securing their interest. This is usually done by a caveat or transmission of title.
If the property has significant equity and there are no other factors stopping a sale, the trustee will sell the estate’s interest in the most appropriate manner. This may be determined by whether there is a co-owner who can afford to purchase the estate’s interest (the bankrupt’s share of the equity), or whether any co-owner is cooperative or not.
But if there is little or no equity at that time, the trustee will have to decide how best to deal with the property. That decision may be taken out of their hands if a mortgagee exercises a security and sells the property. But if no mortgagee takes action, the trustee has a few options. Rarely will the trustee disclaim their interest in the property, but there may be circumstances that will cause them to do so – usually only if the estate is exposed to ongoing costs that will never be met from a sale of the property.
The trustee may be able to sell the estate’s interest in the property – even if there is no equity and commercially it has no value – to a party for what seems like a nominal amount. But the trustee may decide to sit back and hold the property for some time and see whether the value of the property increases and whether that leads to an increase in the equity.
The property vests in the trustee as soon as they are appointed. The trustee then has the right to hold the property for up to 6 years after discharge – when the property will automatically revest to the bankrupt. The trustee will then periodically check the value of the property and, should sufficient equity be generated from either the rise in the value of the property or a reduction in the mortgage, they can sell the property and realise the estate’s share of the equity.
The bankrupt and any co-owner may reside in the property for the interim period. They may do so with the ‘rent’ – being the same amount of the monthly mortgage payment – being paid to the mortgagee. This will maintain the status quo with the mortgage during this period. Effectively the bankrupt continues to reside in the property rent free, but maintains it and the mortgage for the trustee. The trustee and the estate may benefit if the value of the property increases over time.
Simply because a trustee does not take any proactive action to sell a property in the short term, the bankrupt or co-owners cannot assume that the trustee has walked away from the property or will be estopped from selling the property at some time in the future.