Houses and bankruptcy

Don’t just assume you will lose your home when you declare bankruptcy. It is possible you could stay.

While declaring bankruptcy provides you with a fresh start, there are implications for the other members of your family if you lose your home.

The co-owner – your wife, husband or partner – may not want to sell, and moving to a rental home may bring up a range of problems. Your children may need to change schools, which could end their friendships and their feeling of security, and there may also be issues with the family pets, depending on the rules for the rental home.

While your bankruptcy trustee must realise your equity in your home at market value, there are several options for you to hold onto it. For example:

  • Your co-owner, or a trusted friend or family member could buy out your share of the equity from your bankrupt estate. This can be done with one payment or a series of payments.
  • Another option is for a family member to buy the home from your bankrupt estate and for you to then rent from them.
  • If you have money protected by bankruptcy laws, you could buy out your share. This works well if you are a retiree declaring bankruptcy, but you have money in a super fund.
  • You can buy your share of the equity in your home once you have been discharged from bankruptcy. However, if this is to be an option, you must have minimal equity in the home when you declare bankruptcy and then it must not appreciate significantly in value during bankruptcy. This is because the amount you pay is based on the home’s value at the time of the purchase, not at the start of bankruptcy.
  • You can propose a Part 4 Scheme that incorporates saving your home and cancelling your bankruptcy. This is where you ask your trustee to call your creditors to a meeting to seek their agreement for your bankruptcy to be annulled. It is then replaced with a legally binding payment arrangement to extinguish your obligation to your creditors once that payment arrangement has been completed. This is expensive and you should only consider it if you have no other options.

Which option is best for you will depend on how your home ownership is structured, how much equity you have and your circumstances. For example, does the family share your concern about losing the property, or not?

Let’s look at a couple of quick examples to give you an idea of what can be done:

Example A

The home is jointly owned by husband and wife. He needs to file for bankruptcy. There is $50,000 equity and his half share is $25,000. The wife buys the bankrupt estate’s interest for $25,000, either in one payment or by instalments.

Example B

The home is jointly owned by husband and wife. There is no equity but the co-owner does not want to lose it so the co-owner buys the bankrupt estate’s interest for the Trustee’s costs. This amount can be paid up front or by instalments.

Example C

The home is owned by a man who needs to file for bankruptcy. He is retirement age and has $70,000 equity in the property. He files and then legitimately takes a lump sum from his super fund to buy his interest in the property.

Example D

The home is owned by someone who is declaring bankruptcy. There is only $10,000 equity and it is not economic for the Trustee to realise. Unfortunately, there are no trusted family members or friends to save the home but the bankrupt person continues living there. Once clear of bankruptcy (three years), the equity is valued at $15,000 and the discharged owner buys his interest in the home from his bankrupt estate.

Do any of these situations sound like yours? Or are you facing a different set of circumstances? Either way, give Alan Nicholls a call (1300 060 122) to discuss your options.

To keep your stress levels down, it is important we are both transparent and you understand what’s involved in saving your home. If you don’t feel as if you are walking in the dark, your quality of life will improve.

If you believe it’s time to consider bankruptcy, please be clear on the points below before you talk to your family about the whole situation, and how to save your home.

  • Your lender has a mortgage over your home and has the right to sell as mortgagee in possession if you default, so keep your mortgage payments up-to-date.
  • Your trustee views your payment of the mortgage as an occupation fee. That means you must properly maintain your home, pending the possibility the bankrupt estate’s interest in it will be sold.
  • Before your trustee can deal with a trusted family member or friend in terms of taking on your home, he must confirm the mortgage and other transactions relating to the property are legitimate and have not been set up to defeat creditors. Once your trustee has made these checks, he will contact creditors about his plans and allow them time to respond. A creditor must give a legitimate reason for any objection they raise.
  • When your trustee has ticked all the boxes, they can then negotiate with the third party for that person to buy out the bankrupt estate’s interest in your home.
  • The trustee will determine the value of your home by having it professionally assessed by an independent registered valuer. It is important to remember that the value will be as of the time the purchase is agreed to, not at the time you declared bankruptcy.
  • The trustee will be open to realising your equity in the property or selling the property to a third party, but for both scenarios a written contract is needed.
  • To realise the equity, your trustee will deduct the debt owing on the mortgage from the valuation provided by the registered valuer. That determines the sale amount.
  • To give certainty and clarity, your trustee will only enter an arrangement with an associated third party by written agreement. This enables all parties to talk freely about the property, safe in the knowledge that nothing is binding until the contract is exchanged.

More details on options regarding house properties can be obtained by calling Alan Nicholls on 1300 060 122.

Alan Nicholls’ no obligation help desk

Nicholls & Co provide a free, no obligation ‘help desk’ for people considering bankruptcy – we discuss and explain bankruptcy and answer questions for anyone who is considering bankruptcy. The Nicholls & Co help desk can be accessed by phone (1300 060 122) or helpdesk@nichollsco.com.au . Alan Nicholls, Registered Trustee in Bankruptcy is also available to answer your questions to enable you to decide if bankruptcy is right for you.