The family home is the single biggest assets owned by most people, whether it is owned solely or with another person. Often the asset is secured to a financier for money owed either for the purchase of the property, or to secure other borrowings, or both.
This also means that the family home becomes involved in a bankruptcy estate when the owner or one of the owners becomes bankrupt. How the property is handled will depend on the mortgagee and whether only one or all of the owners are bankrupt.
What can happen and the rights of each party are not generally well known by home owners. The important first point is that the bankrupt loses all rights to deal with the property, even if the property remains in their name (before transmission is entered). The bankrupt cannot sign contracts to sell of the property or other documents without the consent of the trustee.
But we are often asked three other questions by non-bankrupt co-owners.
How will the house be sold?
Where the trustee is the only owner and there is equity, he or she can put the property for sale. Where there is a non-bankrupt co-owner, the trustee will usually take the following steps:
(1) The trustee will give the co-owner the opportunity to buy the estate’s interest in the property. This can generally be done without having to pay out the mortgage or even transfer title.
(2) If the co-owner cannot or will not purchase the estate’s interest, the trustee will see whether the co-owner will join with him or her in marketing the property. The net proceeds will be divided in accordance with the ownership interests, and possibly taking into account the doctrine of exoneration.
(3) If an agreement on selling the property cannot be reached with the co-owner (that is, they prove to be entirely un-cooperative and refuse to deal with the sale of the property), the trustee can ask the appropriate court to appoint a ‘Statutory Trustee for Sale’ over the co-owner’s interest to force a sale of the property.
What if there is no equity or little equity in the property?
Sometimes there is no or little equity in the property. In some cases the mortgagees will exercise their rights and sell the property to recover whatever money they can.
But sometimes the mortgages will take no action and the bankrupt or other parties will continue to service that loan. Also over time the value of the property may increase. The bankrupt’s interest in the property automatically vests in the trustee at the time of bankruptcy, and remains vested even when there is no equity and even if the trustee takes no immediate action to sell the property. Further, the property remains vested after the bankrupt has been discharged from bankruptcy.
The trustee will review the equity position from time to time. He or she will be able to take possession of the property (the bankrupt’s interest) and sell that interest realising any equity generated after the date of bankruptcy or after the date of discharge.
This is the case even if that equity has been generated by the continued payment of the mortgage by the bankrupt or the other owner. Mortgage payments attributed to the bankrupt’s share are deemed to be rental payments for the use of the property during that time
How long has the trustee got to sell the property?
Trustees will generally sell property as soon as practical. They want to get the money into the estate.
Section 129AA of the Bankruptcy Act requires trustees to realise property within a period ending six years after the discharge of the bankrupt. This generally allows 9 years (the original 3 years of bankruptcy and the 6 years after discharge) to arrange sales. If the trustee does not do so or seek an extension of that period, the property could revest in the discharged bankrupt.
The six year rule only applies to property disclosed to the trustee. If the property is not disclosed in the bankrupt’s Statement of Affairs or as after-acquired property, the trustee will have 20 years to deal with the property.
The result of the bankruptcy of an owner of interest in real property will mean that the trustee obtains an asset that eventually will have to be realised. The co-owner will have a say in that process as long as they and the trustee act cooperatively. But eventually, and generally as soon as practical, the interest in the property will be sold.