Numerous factors apply to the home and how it can be sold or retained.
How the Bankruptcy Act 1966 applies to a bankrupt’s home, and how they potentially could lose the home, can lead to misunderstandings and misconceptions. Several variables come into play to determine whether a bankrupt's home would be sold in the event of a bankruptcy appointment. This process, unfortunately, and if applicable has the potential to disrupt a bankrupt’s family, including any dependants and partners/spouses. It's therefore crucial that bankruptcy trustees handle the situation with a great deal of sensitivity and understanding, all while upholding creditors’ rights and interests.
Now, let's address a common bankruptcy question: Is a home protected under the Bankruptcy Act?
In short, it generally isn't. The home isn't an excluded asset, and if there's equity in the property after paying off any mortgage and selling costs, the bankruptcy trustee is obligated to sell it.
The process of selling the property tends to be more straightforward when the bankrupt is the sole owner, or if all owners are bankrupt. Commonly though, the bankrupt and a non-bankrupt partner/spouse/third party to jointly own the property. In these scenarios, even though the property is jointly owned, the bankruptcy trustee can still enforce the sale of the bankrupt’s equity share.
If one or more of the registered owners of real property files for bankruptcy, it creates an automatic severance of the joint tenancy in relation to the bankrupt’s ownership interest. The property, at the beginning of bankruptcy, is vested in the bankruptcy trustee, and this vesting leads to the joint tenancy severance. The reason behind this lies in the concept of 'involuntary alienation', which implies a necessary severance of the owner's fundamental legal rights. This practice has been in place since the 1862 Queensland Supreme Court case of Paten v Cribb.
This joint severance is important if a bankrupt dies during the bankruptcy. Otherwise, the bankrupt’s share and equity of the property—would automatically vest in the co-owner upon the bankrupt’s death, and the bankrupt estate would lose the equity in the property.
Another important legal process in the sale of the property is 'entering transmission'. This step involves replacing the bankrupt's name with the bankruptcy trustee's name on the certificate of title, which is necessary for the bankruptcy trustee to execute a sale contract and transfer forms when selling the property.
Determining property equity
Now, how do we determine the property’s equity? The bankruptcy trustee is responsible for getting the property valued. Secured debts, like mortgages and enforceable caveats, are deducted from the property's value, and the bankrupt's share of the equity is then calculated.
What if there's no equity in the property? If the debts secured against the property surpass the current property value, the mortgagees may enforce their rights and sell the property. Alternatively, if the mortgagees choose not to enforce their rights, the bankrupt (and potentially other parties) can continue to service the loan.
How long does the property vest in the bankruptcy trustee?
How long does the bankruptcy trustee have to deal with their interest in the property? Normally the bankruptcy trustee will realise equity in a bankrupt’s property in the first part of the statutory three-year bankruptcy period, however the property can remain vested in the bankruptcy trustee for up to 20 years from the bankruptcy’s date (provided certain notices are issued).
If the property equity is not realised immediately, the bankruptcy trustee can review the property’s equity position through the course of the bankruptcy. Any equity arising during bankruptcy, even if the bankrupt or another owner’s generates equity through continued mortgage repayments, can be realised by the bankruptcy trustee. Mortgage repayments pertaining to the bankrupt’s share are generally considered rental payments for the ongoing property use and occupancy.
What is the sale process, particularly if there are co-owners? If the bankrupt (and now the bankruptcy trustee) is the sole owner, the bankruptcy trustee can put the property up for sale when they determine the appropriate time to do so.
Typically, the bankruptcy trustee has a valuation and reviewed any mortgage/loan documents to determine equity and the decision to sell. They then approach real estate agents for advice on the best method of sale (e.g. auction, expressions of interest, private treaty, etc). Then appoint a lawyer to prepare the sale contact under the bankruptcy scenario. From there, the sale is completed and actioned in the normal protocol.
When there is a property co-owner, the bankruptcy trustee typically follows the process above and gives the co-owner the chance to buy the bankrupt estate's interest in the property, invite the co-owner to join them in marketing and selling the property; or, if there's no agreement, ask the court to appoint a 'statutory trustee for sale' over the property to enforce a sale. This could result in the home being sold, even if the co-owner is solvent and hasn't contributed to the bankruptcy in any way. The net sale proceeds are then shared proportionately between the bankrupt estate and the co-owner according to their ownership interests.
Regardless of the mechanics of the framework outlined above, at Worrells we are insolvency specialists who work together with people and their advisors to solve individual situations and challenges.
Don't let bad debt pin you down. We've got the care, tools, and framework to help the next chapter to start. Contact your local Worrells team today.