How non-bankrupt parties can deal with their interests.
Real property in bankruptcy is naturally of high interest to creditors and to the bankrupt person. It gets even more complicated when there are non-bankrupt co-owners in the mix. Recently, we were appointed bankruptcy trustee of a bankrupt who co-owned two properties in Victoria. This article discusses the mechanics of how real property can be dealt with, and what concerns were raised in this case.
From the outset, the bankrupt and the co-owner expressed an interest in retaining the family home. For the investment property, the co-owner was highly invested (pardon the pun) in selling the investment property outside the context and application of the bankrupt estate, as it was not their concern.
The co-owner made an offer to purchase the bankrupt estate’s interest in the family home; and we reached an agreement to not seek to sell the property if the co-owner paid into the bankrupt estate an amount equivalent to their equity in the property.
Sounds straight forward enough, right?
However, a co-owner being involved makes it more complex. And property law/operation varies in each state/territory.
In this case, the investment property has no equity; the mortgage is in default with mounting interest; the co-owner wants to sell the property for the highest possible sale price; and all while protecting their credit rating. So, what are the options available to co-owners of an investment property when another owner goes bankrupt? Broadly, they are:
- The bankruptcy trustee disclaims any interest in the property—based on commercial considerations for creditors’ benefit.
- The non-bankrupt co-owner buys out the bankrupt’s interest—based on fair market valuation etc.
- The bankruptcy trustee enables the secured creditor to sell—as mortgagee in possession—if they choose to do so.
- The bankruptcy trustee sells through the normal course of a bankrupt estate—where the co-owner might lose out on the net return given several factors (sale timing, capital gains, loss of control in sale process etc.).
In this case, the co-owner was presented with the position as follows:
- If a disclaimer was issued to relinquish the bankrupt estate’s interest on the basis that it is burdened with onerous covenants, this could create more headaches for the mortgagee and co-owner regarding vesting provisions.
- The co-owner may seek to purchase the bankrupt estate’s interest in the property, allowing for title to be transferred to solely their name to deal with the property as they like. However, the co-owner then has stamp duty implications.
- The co-owner and bankruptcy trustee could together consent to the mortgagee taking possession of the property. In this case, the co-owner indicated they do not want this type of sale on their credit file; and believes that any mortgagee-in-possession sale would result in a lower sale price when compared with a normal sale on the market.
- The co-owner could join the bankruptcy trustee in a normal sale. This would seem to be the most straightforward option; however, the co-owner is concerned that any involvement/mention of the bankruptcy would again result in a lower sale price when compared with a normal sale.
As the above demonstrates, there are many factors to be considered for a range of parties’ interests in real property subject to a bankrupt estate. But there are just as many options available depending on the property’s equity position. As bankruptcy trustees, we always work with all interested parties and non-bankrupt co-owners throughout the process and are guided by a formal independent property valuation when agreeing to any sale price.
The family home and bankruptcy
Discharge from bankruptcy is not always the end