Bankruptcy – Will I Lose My House?
The short answer is yes – however there are many variables and different circumstances which can influence the outcome.
A bankruptcy trustee will establish
- the value of the property
- the amount owed to mortgagees and caveators
- whether the mortgages and caveats are valid
- where the is a co owner – determine their intentions
- the validity of any equitable interest claim
There is no time limit in which a trustee has to realise the bankrupts interest in a property, and as a general rule, properties increase in value over time. Accordingly it is often beneficial for co owners to purchase the bankrupt estate’s interest in the property soon after the commencement of the bankruptcy.
Whist bankruptcy ordinarily lasts for three years; the property continues to vest in the estate – the property is not returned.
The trustee is required to sell the bankrupts interest in property in a commercially sound manner. This can include;
- negotiating to sell to the co owner
- sell by public auction
- apply to court for an order to obtain vacant possession and sale
Transferring your property before going bankrupt may not keep it safe from the trustee.
For example, transferring a jointly owned property worth $600,000 with a mortgage of $400,000 to a spouse for “natural love and affection” would be voidable against the trustee. On the basis that no money was paid by the spouse and she was the joint registered proprietor, the trustee would seek to void the transfer which occurred at less the market value, and recover $100,000 being the bankrupt estate’s share of the equity.
A transfer for less than market value five years prior to the commencement of the bankruptcy is void against the trustee. Where the transfer of property is to a related entity and the transferee can prove that the transferor was solvent, the time frame is four years. Where the transferee is not a related entity and they can prove the transferor was solvent, the time frame is two years.
Detailed below is a scenario which shows the different treatment of property in bankruptcy, depending on the circumstances / structure.
It is not uncommon for the husband to go bankrupt as a result of personal guarantees executed in his capacity as a company director, but the wife had no financial interest in the business, was not a director of the company and does not go bankrupt.
They are the joint registered proprietors of their home.
In these circumstances the trustee will generally negotiate with the non bankrupt spouse to purchase the bankrupt estate’s equity in the property.
The sale price will be influenced by:
- The value of the property.
- The liability attaching to mortgages registered on title
- Whether any mortgage liability can be solely allocated to the bankrupt’s share of the equity as it solely relates to his business debt.
- A discount for selling costs.
If an agreement is not reached, the trustee is required to apply to court for an order to sell. Prior to selling, a prudent trustee would obtain vacant possession to ensure that clear title can be provided at settlement. This is an expensive and time consuming alternative to negotiating with the non bankrupt spouse.
(This scenario touches on the Doctrine of Exoneration where the property may be encumbered by a mortgage that secures a loan to the sole benefit of one owner, even though all owners agreed to the mortgage. The Doctrine provides that the person who received the benefit of the loan should have the first obligation to repay the loan – and the co owners share would only be used to meet any shortfall)
House Value $800,000
Mortgage (All business related) $300,000
Instead of the equity being split 50/50 and each co owner being entitled to $250,000 each, the business debt is allocated to the partner solely involved in the business. Accordingly his interest is $100,000 and the co owner’s interest is $400,000 calculated as follows:
Bankrupt’s Interest Co Owner’s Interest
House Value 50% interest $400,000 $400,000
Mortgage (All business related) $300,000 $0
Equity $100,000 $400,000
This is just one example of a multitude of scenarios, each of which are particular to each individuals set of circumstances.
If you would like to discuss specific circumstances in relation to houses and bankruptcy do not hesitate to contact any of our directors to receive the best advice tailored to your specific circumstances.