What can happen to your family home when you are declaring bankruptcy?

Bankruptcy is a formal legal process where you’re declared unable to pay your debts. When you become bankrupt, you don’t have to pay most of the debts you owe. Bankruptcy provides relief from the stress of debt and the harassment from debt collectors, allowing you to make a fresh start. However, while bankruptcy can free you from some of your debts, it can have a significant impact on your financial situation for several years. Understandably therefore, many people who think about declaring bankruptcy want to know what will happen to their family homes when they declare bankruptcy.

It is important that you understand the rules under which you can potentially lose your home in the event of your bankruptcy. In this post, we will discuss the impact of your bankruptcy on your family home and review what will happen in the case of different forms of home ownership.

What happens to your house after bankruptcy?

When you are declared bankrupt, you are appointed a trustee to oversee your financial affairs and administer your assets for settling debts of unsecured creditors. After you declare bankruptcy, the ownership of your share of the house is transferred to your trustee. This means that the trustee can legally sell the house to pay off your outstanding debt. However, before deciding on the sale of the house, the trustee usually assesses the value of the house, calculates your outstanding debt, and discovers the co-owners of the house to deal with the property according to the following situations.

Mortgaged house owned by the bankrupt

If you have a mortgage and you fail to make repayments, the bank or lender can take possession of the house and sell it. A mortgage is a secured debt and the house acts as collateral, which secures the interest of the mortgage lender in the event of the borrower’s default or bankruptcy. Even if you don’t have any equity in the house, the mortgagee or the trustee can prevent you from selling it by lodging a caveat. After some time when some equity is created due to price appreciation or mortgage repayments, the trustee can consider selling it.

What if the house is co-owned by a non-bankrupt person?

It is quite common for couples to jointly own a house. So, if one partner files for bankruptcy while the other is non-bankrupt, what would happen to the house in such a situation? In such a case, the trustee cannot unilaterally sell the property as the property involves the non-bankrupt person’s interest as well. But the non-bankrupt co-owner can deal with the property only with the trustee’s consent.

The trustee first determines if there is sufficient equity available in the property before deciding on the future course of action. The non-bankrupt owner and the bankrupt party have the following options concerning the house:

  • The non-bankrupt owner can arrange funds for the bankrupt owner to settle the due debts along with bankruptcy costs. If the person declaring bankrupt successfully repays all the debts, the bankruptcy would be revoked and the bankrupt’s share in the property would also be restored.
  •  According to Section 73 of the Bankruptcy Act 1966, the person declaring bankrupt can enter into a debt settlement compromise with creditors. If creditors agree to the proposed compromise, both the bankrupt and non-bankrupt owners will retain their shares in the property and the bankruptcy will be annulled.
  •  The non-bankrupt owner can offer to purchase the bankrupt’s owner share in the house. Suppose a house is co-owned by a couple, and one of them is bankrupt. If the non-bankrupt owner offers to the trustee to buy the equity or the bankrupt’s share in the house, by doing so, the couple can keep the house. For example, if the couple’s house had a mortgage of $500,000 while the value of the house was $800,000, the net equity of the couple in the house would be $300,000 ($800,000 minus $500,000). If the couple had a 50% share in the property, the non-bankrupt owner can purchase the bankrupt’s share from the trustee by paying 50% of the equity ($150,000).
  •  If the options mentioned above are not possible, the non-bankrupt owner can allow the trustee to sell the home. The proceeds from the sale, after deducting the cost of the sale, will be distributed among joint owner(s) according to their percentage of interest in the property.
  •  If the co-owners don’t agree on any of the above options, the trustee can go to court to apply to sell the property. In such a case, the court can appoint a statutory trustee for carrying out the sale. The costs of statutory and legal trustees will be paid from the sales proceeds, and the co-owners will lose ownership of the house.

What if the bankrupt has no financial interest in the family house?

The trustee cannot claim the house if the bankrupt doesn’t have any financial interest in it. But the trustee will investigate your financial interest in the house even if you are not the registered co-owner. For this purpose, the trustee can ask the non-bankrupt party to provide evidence of being the sole owner of the house. However, if during the investigation, the trustee finds out that you indeed have a financial interest in the house, the trustee can claim your share in the house.

What will happen to the house after bankruptcy ends?

The trustee can still sell your house even after the end of your bankruptcy. The trustee will keep an eye on the value of the house to calculate the available equity in the house. If the equity in the house increases due to an increase in the value of the property or regular mortgage repayments over time, the trustee can sell their interest in the property or sell the house in the open market, even after the end of your bankruptcy. However, in most cases, the trustee can legally deal with your property for a maximum of six years from the date your bankruptcy is discharged. You can contact your trustee for more details.

Final Thoughts

One of the biggest worries of a bankrupt person is the fear of losing his/her home due to bankruptcy. In case the bankrupt person is the sole owner of the house and has sufficient equity in it, the trustee can take over the asset to recover the debts.

On the other hand, if a non-bankrupt person co-owns the house with the bankrupt, the trustee only controls the bankrupt person’s share in the property. The trustee can still sell the asset, but the non-bankrupt person can still take some steps to keep the ownership of the asset by either purchasing the bankrupt’s share or by paying off the debts of the bankrupt.

You can always contact your trustee or a credit repair expert to seek financial advice if your situation is different from the cases we discussed in this post.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.