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Bankruptcy and The Family Home – it’s Mine to Deal with isn’t it?


Bruce Gleeson
Bruce Gleeson

Undoubtedly one of the most important questions asked by individuals who may be contemplating bankruptcy is what will happen to the family home? It is understandably a question that emotionally occupies the mind of the individual [or couple] as other key aspects centre around it, such as: the impact on children and schooling [including before and after school care]; and concerns regarding the ability to otherwise find somewhere with similar amenities.

Such emotion can be heightened where the spouse/co-owner who is not subject to financial distress is unaware of the current predicament. In my view, it is vital that empathy is shown in dealing with this aspect, whilst still properly dealing with same. It is the latter point, particularly where I continue to see individuals receiving incorrect advice [including that available on the internet] from supposed experts in the area.

Equally, it is vital that individuals who enter into bankruptcy understand what future impacts there may be regarding the property – even after they are discharged! A bankrupt cannot assume that once they are discharged [which usually occurs 3 years after the commencement of bankruptcy] that they will be free to deal with their interest in the property.

This article will help explain some of the key considerations to be given when property [particularly the family home] becomes intertwined with the bankruptcy process.

1. What happens to Property [ie the Family Home] upon Bankruptcy?

In accordance with Section 58 of the Bankruptcy Act (“the Act”), upon bankruptcy all property of the bankrupt, with the exception of property outlined in Section 116 of the Act (for example certain household furniture and effects) is realisable. Hence the family home or any other real estate (including interests overseas) are available for Bankruptcy Trustee’s to meet the claims of creditors.

The effect of bankruptcy, particularly regarding real estate is that at the commencement of the bankruptcy, the bankrupt’s interest is severed from being that of a “joint owner” such that the Bankruptcy Trustee can seek to realise or sell this share for the benefit of unsecured creditors.

Shortly after the commencement of the bankruptcy, it is quite normal for a Bankruptcy Trustee to place a registered caveat over the family home (and other real estate) so that parties enquiring about the property are aware of the interest of the Bankruptcy Trustee. We regularly write to the bankrupt and co-owner (if there is one) informing them of the overall position and what options are available in terms of dealing with the equity position. It is this communication that I find from time to time which is forgotten by bankrupt’s with the passage of time.

2. So who can realise the Property/ Real Estate after the commencement of bankruptcy?

Whilst a mortgagee over real estate can still exercise their rights (Section 58(5) of the Act), in the absence of this, it is the Bankruptcy Trustee that would seek to realise the bankrupt’s share in the property or the family home. Importantly, this power also this needs to be considered with Section 129AA of the Act. In short Section 129AA contemplates when the bankrupt’s interest in the property/real estate will revest or revert back to them. Generally speaking this does not occur until the end of the 6th year after they are discharged from bankruptcy. Consequently the Bankruptcy Trustee has up to 9 years to realise the property/real estate.

We have seen particularly over the past two years as real estate markets in Sydney and Melbourne have significantly increased that real estate which may not have had equity at the commencement or end of the bankruptcy now has and the discharged bankrupt (as their three year period of bankruptcy has ended) becomes quite understandably frustrated when informed that the Bankruptcy Trustee still have an entitlement to realise the equity (subject to certain considerations) for the benefit of unsecured creditors. In some cases the equity position might have increased by close to $100,000 or more!!

3. What are the key considerations to be given when considering keeping the family home or other real estate?

Shortly after the commencement of bankruptcy, a Bankruptcy Trustee will write to the bankrupt and co-owners informing them of the appointment and what options are available. Certainly this is the practice of Jones Partners. Among the options are:

a “Deed of Forbearance”; or
a “Deed of Sale”.

The former option contemplates a position where the real estate is owned solely by the bankrupt and there is an offer put forward to the Bankruptcy Trustee which results in the realisation of an amount equivalent to the equity in the property.

The later option, generally involves the co-owner or a family member making an offer to acquire the bankrupt’s share of the real estate.

Whilst it is entirely a matter for the bankrupt/ co-owner or family member, our view is that once the Bankruptcy Trustee has had sufficient time to determine the equity position in the real estate, if the bankrupt (and their family) is desirous of staying in the family home, the sooner an offer is put to dealing with the equity position, the better.

Even if an offer cannot be put forward early on in the bankruptcy, we strongly suggest, particularly with regard to the family home, that the bankrupt re-consider the position annually and certainly when they are due to be discharged at the end of the three year period of bankruptcy.

The present property cycle as mentioned in point 2 above is clear evidence of what happens when the matter is delayed for considerable time. In making this comment, we of course realise that the act of bankruptcy itself may mean that available funds may be scarce for the family.

Ultimately, if there is sufficient equity in the family home and the bankrupt, co-owner or other family members are not able to put forward an acceptable offer, then the Bankruptcy Trustee will have to consider placing it on the market for sale. However, there are obviously considerations that may impact this, such as co-ownership of the property etc.

4. How is equity determined?
In determining the equity position, the Bankruptcy Trustee will generally obtain a number of market appraisals and a formal valuation.

They will also seek to confirm the present mortgage outstanding and any other particular factors (which may vary from matter to matter, ie doctrine of exoneration claims). Once they have this information, they will be able to determine the equity position.

5. The Family Home Doesn’t Need to be Lost in Bankruptcy

Whilst each particular position will need to be considered in its own right with regard to equity, individuals should not automatically believe that the family home will be lost in bankruptcy. We have and continue to be appointed to Bankrupt Estates where the bankrupt and their family reach a satisfactory arrangement with us as Bankruptcy Trustee which not only means that they do not have the significant emotional stresses to deal with by relocating, but quite often the outcome minimises the professional costs of dealing with the property and optimising the chance of a dividend to unsecured creditors.

In my next article I will consider the “Doctrine of Exoneration” and how this issue can be critical for the co-owner when putting forward an offer to the Bankruptcy Trustee for the bankrupt’s interest in real estate.


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