Under the Bankruptcy Act, the family home is not listed as a protected asset. Therefore the trustee of a bankrupt party is under an obligation to realise the property after paying out mortgage and selling costs. However it is important for the trustee to manage this process tactfully as the loss of a family home effects not just the bankrupt but their family members as well.
Where the home is owned by joint owners and one of the owners is the bankrupt party, the trustee can realise the bankrupt’s share of the home. This first occurs through the termination of the joint tenancy to ensure that the bankrupt’s share in the home does not transfer to the co-owner upon their death. Following this, the parties interests in the home are instead held as tenants in common, as the bankrupt’s share has been vested in the trustee.
Once the property has been placed on the market, the co-owner will be given the opportunity by the trustee to purchase the bankrupt’s share in the property. If they are not able to do this, the trustee will seek to establish whether the co-owner will cooperate in marketing the property on agreed terms. If agreement cannot be reached, the trustee can request that a ‘Statutory Trustee for Sale’ be appointed over the co-owner’s share of the property to force the sale.
Bankruptcy can itself lead to a default on the mortgage. In this case, the mortgagee then has the right to sell the property, however they are unlikely to exercise this right where the bankrupt party still has the capacity to continue making payments on the loan. The trustee will generally allow these repayments to continue being made provided there are arrangements for the equity to be paid into the estate.
In the case of joint ownership where a mortgage has been granted only to one party, under the doctrine of exoneration, the person who secured the loan is the one obligated to repay the loan. In that situation, the co-owner is considered a guarantor and is only obligated to meet any shortfall. The doctrine of exoneration will apply if the trustee finds persuasive evidence that it is applicable.
Where the trustee is satisfied that there is equity in the property, the sale process begins with the trustees name replacing the bankrupt’s name on the certificate of title. A caveat can be lodged by the trustee to protect the estate’s interest while a decision is made about what to do where there is doubt about the outcome of a potential sale.
Section 129AA of the Bankruptcy Act states that the trustee must realise the property within a period ending 6 months after the discharge of bankruptcy, otherwise it may revest in the discharged bankrupt. Where a sale takes place, the bankrupt is usually given a few weeks to make alternative living arrangements before having to vacate and in some cases will be permitted to remain in possession during the sale process provided they make rental payments and maintain the property. However generally the trustee is required to provide vacant possession prior to settlement.
The entire proceeds of the sale following the payment of mortgage and selling costs, go the estate in the situation where the bankrupt was the sole owner of the property. Where there is more than one owner, the surplus is divided according to the legal entitlements as shown on the title deed.