BANKRUPTCY & THE FAMILY HOME
Will my family home be threatened by my Bankruptcy?
The potential loss of a family home is likely to be felt more intensely than the loss of any other asset. Such an event will not only affect you as the bankrupt, but also your solvent partner and their children. Because of these factors, trustees in bankruptcy are morally obliged, while also protecting the rights and interests of creditors, to approach the realisation of your interest in a family home with tact and understanding.
Is my family home protected in Bankruptcy?
Your family home is not a protected asset under the Bankruptcy Act. If you hold equity in the property, the trustee will be obliged to realise the property after paying out any proper mortgage and selling costs.
What if my family home is jointly owned?
Trustees are obliged to realise your assets as the bankrupt and this is mostly straightforward if you are the sole owner of a property. In most cases however, you and your spouse will jointly own your home, and even if your co-owner is not bankrupt the trustee is likely to try to realise your share of the home’s equity. The available options are discussed below.
How would equity in our family home be determined?
The trustee must have the property valued by a qualified valuer or estate agent. As the bankrupt, your share of the equity is determined from that value, after secured debts have been deducted. Trustees are obliged to obtain the best price for the home and if they decide to sell it will always attempt to sell at market value.
How are properties realised?
The trustee will usually take the following steps where a co-owner is involved: (1) give the co-owner the opportunity to buy the bankrupts share of ownership of the property, or (2) if that is not possible, see whether the co-owner will join with the trustee in selling the property on agreed terms; or (3) if an agreement to sell the property cannot be reached, petition the Court to appoint a “Statutory Trustee for Sale” over the co-owners interest to force a sale of the property. Appointment of a Statutory Trustee forces the sale of the home, without regard for the solvency the co-owner who may not have contributed in any way to the bankruptcy. The Court will usually attempt to soften the effect of such an order by allowing the spouse time to relocate, however the sale of the property will be the ultimate effect.
What does “entering transmission” mean?
The property sale process usually begins with the trustee “entering transmission”. This is the term for the legal process for placing the trustee’s name on the title deed in place of the bankrupt’s, enabling the trustee to execute a sale contract and transfer. The trustee will usually only enter transmission if he is satisfied that equity exists in the property and that a sale is likely. If there is doubt about the final outcome, the trustee may initially lodge a caveat over the title to protect the estate’s interests for the short term.
What happens if our property is mortgaged?
Most family homes are subject to a mortgage. Because the bankruptcy itself may be a default, the mortgage can still be enforced, even when the mortgage payments are up to date. Although lenders do have the power to sell a bankrupt’s home, in most cases they will leave the task to the trustee.
What if I am able to continue with the mortgage payments?
If you as the bankrupt have the capacity to continue making payments, mortgagees prefer to allow the loan repayments to continue and will not usually insist upon taking possession of the property. Trustees are likely to have no objection to this, provided you as the bankrupt arrange for your equity in the property to be paid to your bankrupt estate. This type of arrangement benefits everyone; your bankrupt estate receives the equity in the property, the mortgagee retains a performing loan and the bankrupt’s family avoids the sale of their home. However the trustee may still decide to sell the property despite mortgage payments being kept up to date, if for example there may be a benefit from the extra equity created in the property because of the mortgage payments.
When would we have to vacate?
Sale of any property normally requires vacant possession so in most cases you will be required to vacate the property before settlement. Trustees do not usually expect a bankrupt to vacate the premises immediately a sale decision has been made and will, in normal circumstances, allow a few weeks for you to make alternative arrangements. In some cases the trustee may allow you to remain in residence during the selling period, on condition that you cooperate, contribute a fair rent, maintain the property, and assist the trustee in the selling process.
How would the property sale proceeds be distributed?
If you as the bankrupt wholly own the property, your bankrupt estate would receive the entire surplus of the property sale, after any mortgagee is paid. If the property is co-owned, the trustee will share the surplus with the solvent co-owner on the basis of the co-owner’s legal entitlement shown on the title deed. Despite the title to a property being held equally, it may be that uneven contributions have been made towards the acquisition or development and in certain cases this may lead to one party holding the property for the other party in a constructive or resultant trust, possibly alter the distribution.
When does the “Doctrine of Exoneration” apply?
The property may be encumbered by a mortgage that secures an advance for the sole benefit of one owner, even though both owners have agreed to the mortgage. This may cause an uneven distribution of the surplus under the “Doctrine of Exoneration”. The Doctrine says that the person who received the benefit of the loan should have the first obligation to repay the loan, and the co-owner should only be considered a guarantor, and their share only be used to meet any shortfall. Note however, that the trustee must find compelling evidence that the “Doctrine of Exoneration” ought to apply will not apply it without a full review.
Is there a time frame for realisation of a property?
Section 129AA of the Bankruptcy Act requires trustees to realise property within a period ending six years after the discharge of the bankrupt, generally allowing 9 years to arrange sales. If the trustee does not do so, the property could re-vest in the discharged bankrupt, but the trustee may obtain an extension of this time period. The six-year rule applies only 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.
What about Bankruptcy and War Service Homes?
The provisions of the Defence Service Homes Act provides under Part X of the Bankruptcy Act that a bankrupt or a debtor cannot have a war service home taken from them, except in extraordinary circumstances.
What happens in the case of joint tenancies?
When one of the parties to a joint tenancy is bankrupt, the tenancy in question is automatically severed. This is due to “Involuntary Alienation”, or the severing of the fundamental legal rights of the parties that are necessary to maintain a joint tenancy. The trigger to the alienation of legal rights is the vesting of the property in the trustee; a long established practice. After the joint tenancy is severed, the interests in the property are held as tenants in common.