The family home is by far the most valuable asset for most families.
Therefore, it only makes sense to take every precaution to protect it. Remember, when a person files for bankruptcy, their assets are “vested in” their trustee in bankruptcy, who can sell the assets to pay creditors. No one ever plans to face bankruptcy, but there is always steps you can take to safeguard yourself against any possible future outcome.
Your home is not safe from creditors
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.
Therefore, whether your family home is registered solely in your name or jointly with your spouse, it is important to review your situation if your home is at risk from 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.
Powers of the Trustee in bankruptcy
The trustee in bankruptcy has the power to enforce the sale of your family home, even if it is held in the joint names of the bankrupt and their spouse. This is true even if the non-bankrupt spouse is debt-free, has no knowledge of the debt and is at no fault. This applies both where the real property is 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”. This means the bankrupt’s share in the asset is separated and can be used to pay creditors. The non-bankrupt’s share is NOT prejudiced. It is unfortunate for them, however, that the only way for creditors to obtain the value of the bankrupt’s share of the home is for it to be sold in its entirety. This is, unless of course, the non-bankrupt person is willing to pay the bankrupt’s share of the asset to the trustee.
What rights does a non-bankrupt spouse have?
While the position of the non-bankrupt spouse seems quite glum, they do have some very important rights. An 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.
What can I do to protect my home?
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 or allow a trustee in bankruptcy to dictate what happens to your assets. You will often have better options available.
The most effective way to give yourself other options is to engage in prior planning and crisis 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, which are minimal when compared to the potential benefit.
Timing is critical
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.
Do you have any other advice to share? Comment below.