The family home is the most valuable asset for almost every family. It therefore makes sense to take every step possible to protect it. Remember, if a person becomes bankrupt, all their assets become “vested in” their trustee in bankruptcy, who can then sell the assets to pay out creditors. No one ever plans to find themselves facing bankruptcy, but it is always important to safeguard yourself against any possible future situation.
Your Home is Not Protected
Whether your family home is registered solely in your name or the joint names of you and your spouse, it is important that you review your situation if you feel that your home may be under threat by creditors. This may be so if you are a business owner, or if you fear you may be subject to a claim as a director of a company.
The family home is NOT protected under the Bankruptcy Act. If there is equity in your home, the trustee in bankruptcy will enforce the sale of your home and net the proceeds on behalf of creditors.
What Powers does the Trustee in Bankruptcy have?
Where the family home is held in the joint names of the bankrupt and their spouse, the trustee can still enforce the sale of the asset, even if the non-bankrupt is debt-free, has no knowledge about the debts and has done nothing wrong. This applies to family homes held as joint tenants and tenants in common.
Once the family home is vested in the trustee, the joint ownership of the asset is “severed”, - i.e. the bankrupt’s share in the asset is separated and can be used to pay creditors. The non-bankrupt’s share is not prejudiced. To realise the bankrupt’s share of the asset though, it must be sold in its entirety, unless the non-bankrupt person is willing and able to pay the bankrupt’s share of the asset to the trustee.
What Rights does the Non-Bankrupt Spouse have?
While it may seem that there’s no light at the end of the tunnel for the non-bankrupt spouse, they do have some important rights. One example is where the bankrupt spouse has taken out a loan secured by a mortgage against the family home which is for their own benefit – for example, a subsequent mortgage to buy a car. Here, that loan may “come off” the bankrupt spouse’s share in the property, rather than the non-bankrupt’s share, essentially leaving the non-bankrupt’s share unaffected.
How Can I Protect My Assets?
Bankruptcy is a complex area of law, especially when it comes to how assets such as the family home are dealt with. If you and your family ever find yourself in this situation, please don’t panic and allow a trustee in bankruptcy to dictate what happens to your assets. You may have other better options available.
The most effective way to give yourself other options is to engage in prior planning and prevention. If bankruptcy is a possible threat in your future, you may want to consider one of the following steps:
a) Have the asset put only in the name of the spouse that is not at risk of bankruptcy, or another entity;
b)If it is not possible for the non-at-risk spouse to secure a mortgage on their own, you could instead put a small percentage of the asset in the at-risk spouse’s name, and the major share of the asset in the name of the not-at-risk spouse.
The cost of these steps is insignificant in light of the potential benefits. Any such transfer between spouses is exempt from stamp duty, so only conveyancing fees will apply.
Timing is Everything!
If you take these steps within 6 months of the commencement of bankruptcy, the trustee in bankruptcy could seek to have the transfer reversed. However, if you take these steps early, and become bankrupt at some future date, the transfer will be valid, and your family home will be protected.
If you are in business, or otherwise feel that your assets such as your family home, may be at risk of claims from creditors, please don’t hesitate to contact me.