One of the most common questions we get from individuals under financial distress and considering bankruptcy, is the fear of losing their residential property, the family home.

As is usually the case, the answer is not a simple yes or no (unfortunately!) and will depend on all of the circumstances, however there certainly are ways that the property can be dealt with that will enable the home to be retained. We expand on this below, but suggest you contact us to discuss your particular circumstances if this is an imminent concern.

Unlike certain protected assets also known as “exempt assets”, real property vests in the Trustee in bankruptcy (Section 58 of the Act) and is a divisible asset in the bankruptcy (Section 116 of the Act), i.e., it is the Trustee’s duty to realise the equity available in the property for the benefit of the creditors.

A bankruptcy Trustee will ordinarily sell the property on the open market (in conjunction with co-owners, if jointly owned) for the benefit of Estate. It is however possible for the Trustee to sell the Bankrupt’s share in a property to the non-bankrupt co-owner, or to some other family member or friend, as explained below. The bottom line is, it is the Trustee’s role is to recover fair value for the bankrupt’s property, he does not care who the purchaser is and it is important to note bankruptcy should not be viewed as a punishment and it is not the aim of the Act to see people kicked out of their homes.

Jointly Owned Property

Jack and Diane jointly own  a home with an estimated market value of $500,000 and mortgage of $450,000.

Jack has incurred substantial debts in running his business and has no alternative but to file for bankruptcy. Jack is concerned that the Trustee will sell the family home.

Equity Available

Prior to making any decision a Trustee would generally ascertain the equity in the property (the Trustee will need to obtain property appraisals or valuations and mortgage payout figures):

Property Value:                              $500,000

Less: Property Mortgage:             ($450,000)

Property Equity:                               $50,000

Jack’s Equity:                                   $25,000 (50%)

Diane’s Equity                                  $25,000 (50%)

As Jack is now Bankrupt, his equity vests with Trustee. Therefore:

Trustee’s Equity:                              $25,000 (50%)

Diane’s Equity                                  $25,000 (50%)

 
Equity Sale Transaction

The Trustee would then write to Diane (co-owner) seeking an offer from her (or the purchaser could be some other family member or friend willing to help out) to purchase the Trustee’s equity in the property. As Diane and Jack do not wish to lose  the family home, Diane responds to the trustee with an offer of $25,000.00. The Trustee’s accepts the offer, as it is plainly commercial and complies with his duty to realise the Bankrupts interest in the property. As long as Diane makes the required payment the Trustee relinquishes his interest in the property.

Sole Owned Property

Similarly to the jointly owned property situation, here the whole of the equity in the property vests with the Trustee. Using the same example as above (without Diane in the picture), the equity in the property is as follows:

Property Value:                              $500,000
Less: Property Mortgage:             ($450,000)

Property Equity:                              $50,000

Jack’s Equity:                                  $50,000 (100%)

As Jack is now Bankrupt, his equity vests with Trustee. Therefore:

Trustee’s Equity:                             $50,000 (100%)

Jack notifies the Trustee that he has an interested third party (his father for example) who is willing to acquire the Trustee’s equity in the property. The Trustee’s receives an offer of $50,000 from Jack’s father to purchase the property equity. The Trustee assesses the commerciality of the offer and accepts the offer on the basis the overall return would be better for creditors., The improved return can be achieved by avoiding some of the  costs that would ordinarily be paid in a sale of property on the market. such as marketing costs, agent commissions, solicitors, as well as extra Trustee costs. Jack’s father makes payment and the Trustee relinquishes his interest in the property.

Remember, feel free to contact us at RCIG at any time, we will provide expert, unbiased and no cost or obligation advice, at any time.