Bankruptcy and the family home – a relief with a serious consequence

The bankruptcy path is not an easy one and should not be taken lightly given the consequences that follow.  Whilst bankruptcy can offer relief, release you from debts and allow you to look to new beginnings in the long term, the short-term consequences can be significant. To learn more about bankruptcy generally and its process read our blog What it means to be bankrupt and how we can help.

The consequences of bankruptcy of a spouse can impact the whole family.

If your spouse is made bankrupt, the appointed trustee in bankruptcy will take control of the bankrupt’s assets and sell them, where possible, to pay creditors. This may include property such as your family home which is not a protected asset under the Bankruptcy Act.

How the property is dealt with by the trustee will depend on the mortgagee and whether only one or all of the owners are bankrupt.

Typically, if the property is owned solely by your spouse and there is equity in the property, then it will be sold by the trustee. If the property is jointly owned by you and your spouse as joint tenants, the joint tenancy will automatically be severed upon the bankruptcy of your spouse.  The home ownership will change from joint tenants to tenants in common. The trustee in bankruptcy can then sell the bankrupt spouse’s share in the property.

The trustee in bankruptcy will typically take the following approach:

  1. Obtain a valuation of the property to determine its market value.
  2. Give the non-bankrupt spouse the opportunity to purchase the bankrupt estate’s interest in the property at market value.
  3. If the non-bankrupt spouse cannot or will not purchase the bankrupt estate’s interest, invite the non- bankrupt spouse to join the trustee on agreed terms to market and sell the property. The net proceeds will be divided (after payment to creditors) in accordance with the ownership interests.
  4. If an agreement on selling the property cannot be reached with the non-bankrupt spouse (e.g. the non-bankrupt spouse is uncooperative and refuses to deal with the sale of the property), the trustee can ask the court to appoint a statutory trustee for sale over the non-bankrupt spouse’s interest to force a sale of the property. While the court will often try to help the non-bankrupt spouse by giving them time to relocate and find another property the outcome is usually that the property will be sold.

It is essential to realise that one of the consequences of bankruptcy may be the sale of your family home to pay out creditors and it is important to seek legal advice. Our experienced insolvency and bankruptcy lawyers will help you understand your options and assist you in minimising the inevitable impact of the bankruptcy on your family. We’re here to help.