Bankruptcy

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30 Nov 2014

Why transferring property to related parties prior to bankruptcy is risky business

READ TIME

3 min

Safe as houses?

It is not surprising that people will do whatever it takes to protect their family home. Unfortunately, ‘whatever it takes’ means people sometimes transfer their home at undervalue or in an attempt to put the property out of the reach of creditors and they then become bankrupt.

Not only does divisible property (including real property) vest in a bankruptcy trustee upon their appointment, but a trustee can void transactions made prior to bankruptcy in certain circumstances.

Recently in our Canberra office we have had a number of bankruptcy files involving the transfer of properties to either a bankrupt’s son or daughter prior to bankruptcy at undervalue. Largely, the consideration paid for the transfer of each property has been equal to the mortgage value only.

In one file, the bankrupt sold his property to his son for $295,000 some two and a half years prior to bankruptcy. The bankrupt disclosed the transfer of this property in his Statement of Affairs (lodged at the time of bankruptcy). Our enquiries into the transaction confirmed the amount required to discharge the mortgage on the property at the time of transfer was...you guessed it— $295,000!

We also found that the bankrupt had obtained a valuation of the property from a registered valuer around two months prior to the transfer for stamp duty purposes. The valuation put a market value on the property of $380,000.

Accordingly, we sought payment of $85,000 (the difference between the amount paid by the son and the property’s market value). Despite the property valuation, the bankrupt's son tried to argue that the market value of the property was only $295,000 as that was all he was willing to pay for the property!

Sometimes people get creative and while it may appear that market value has been paid for the property, an analysis of the settlement statement and associated documents will find that the consideration paid was less than market value.

This was the case in another file where a bankrupt and her non-bankrupt husband sold their unit to their daughter. While the unit was sold for $230,000 (market value), the settlement statement and other bank documents disclosed that only $191,000 was provided by the financier and of that—$41,000 was paid to the daughter!

The consideration paid for the unit was therefore only $150,000 and we sought payment of $40,000 being half of the difference between this amount and the purchase price of $230,000 (on the basis that the bankrupt had a 50% share in the unit).

The key message is that transfers of property to family members (or related entities) within four years before bankruptcy will only be protected if market value is paid. Otherwise, you should expect a knock at the door from a bankruptcy trustee!

Further information on Voidable Transactions in bankruptcy is on our website:

http://www.worrells.net.au/InsolvencyResources/FactsheetArticle.aspx?ArticleId=43

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