Resource ● Last updated 27 September 2023 ● 11 min read
What happens to the family home during bankruptcy?
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What is this resource?
This resource explains what can happen to a family home when you or a co-owner become bankrupt.
During bankruptcy, one of the most common questions people ask is ‘Will I lose my home if I go bankrupt?’. The answer depends on your individual circumstances. Not everyone loses their home during bankruptcy, but it’s important to be aware of the rules and procedures in place.
This fact sheet covers:
- What is bankruptcy?
- What happens to my home if I become bankrupt?
- Under what circumstances will a home be sold in bankruptcy?
- What is the process for selling a home during bankruptcy?
- Things to be aware of during the sale process
- What happens after my home is sold?
- What if the person you co-own a home with goes bankrupt?
What is bankruptcy?
Bankruptcy is a legal process through which you are declared unable to pay your debts when they fall due. You can become a bankrupt in one of two ways. You may file for bankruptcy (voluntary bankruptcy), or alternatively, creditors can apply to have you declared bankrupt (involuntary bankruptcy). If you are declared bankrupt by either of the above means you will be removed from managing your own finances, a trustee will be appointed to manage your money and assets, and your property will vest in the trustee.
To understand the ways in which bankruptcy may affect you, please read our resources on the ‘Consequences of Bankruptcy’ and ‘Bankruptcy and Joint Assets and Debts’.
The purpose of this resource is to explain what will happen to your home when you or a co-owner become bankrupt.
Definition – Vests
When property vests in the trustee, this means that the trustee (in effect) becomes the owner of the property and can deal with the property for the benefit of the bankrupt estate
What happens to my home if I become bankrupt?
When you become bankrupt, your trustee (in effect) becomes the owner of your share of the home. This means your trustee now has control over your share of the home and can sell the home to help pay your debts.
In what circumstances will the home be sold?
The home is not always sold. Whether or not the home is sold will depend on your individual circumstances. The trustee will consider factors such as:
- The value of the home and if there is equity in the home
- whether there are any debts over the home for example, a mortgage
- whether the home has been purchased with protected money
- who owns the home and if there are any co-owners
- who becomes bankrupt: the sole owner, one of the two co-owners or both co-owners
The trustee does not need to make a decision to sell the home straight away. Generally, an individual remains bankrupt for 3 years. If the trustee decides to sell the home, they must sell it within 6 years after an individual’s bankruptcy ends. This allows 9 years to arrange the sale (if any).
The 6-year rule only applies if the trustee is aware the home exists. If a home is not disclosed in the bankruptcy documents, the trustee will have 20 years from the date of the bankruptcy to claim the property.
Equity
Usually the trustee will only take action to sell the home if there is equity in the home as this means there will be money available to the trustee after the sale of the home to help pay your debts.
If there is no equity in the home, the trustee may not sell the home. However, the trustee will usually lodge a caveat on the property to prevent you or the non-bankrupt co-owner from attempting to sell or re-finance the home.
Even if there is no equity in the home at the time you are declared bankrupt, equity in the home may be created if the home increases in value or subsequent mortgage repayments are made during your bankruptcy period (usually 3 years). If this happens, the trustee may reconsider whether it should sell the home.
Definitions
- Having equity means that your home is currently worth more than the value of the debts secured against it. For example, if a home is valued at $200,000 and the debts secured over it are $100,000, the home will have $100,000 equity.
- A caveat restricts any new interests from being created over a home without the permission of the caveat holder (which in these circumstances will be the trustee).
Mortgage
If you have a mortgage over your home, the mortgagee (a bank or lender) can take possession of the property in certain situations. The most common reason for banks to repossess homes is a failure by the owner/borrower to meet the mortgage repayments. However, some home loan contracts also allow the mortgagee to step in and sell the home if one or all the co-owners become bankrupt. You should check your home loan contract to see what circumstances apply to you.
Protected money
If the whole or substantially the whole of your home was purchased with protected money, it cannot be sold by a trustee to pay off your debts.
If only part of your home was purchased with protected money the trustee can still sell your home and will pay you the part of the proceeds of sale as can be fairly attributed to the protected money.
Definition
Protected money includes certain superannuation funds, insurance policies and workers compensation payments.
What is the procedure for selling the home?
The process for selling the home will depend on whether your home is held in sole ownership or co-ownership.
Sole ownership
Definition
Sole ownership means that only one person owns the home.
- If you are a sole owner who becomes bankrupt, the trustee will transfer the legal title to the property from your name to the trustees.
- The trustee will then determine if the home is to be sold. The home will likely be sold if:
- there is equity in the home; and/or
- it was not purchased with protected money
- Once the home has been sold, the proceeds from the sale will be used to repay your debts.
Co-ownership
Co-ownership is the term used to refer to two (or more) people owning a home together. There are two types of co-ownership: joint tenants and tenants in common.
You are a joint tenant if you:
- acquired your interest in the home at the same time and in the same transaction as your co-owner;
- have an identical interest in the home as your co-owner. This means that the nature, extent and duration of your interest is exactly the same as that of your co-owner; and
- have an equal right to possession of the entire home.
What happens if you are a joint tenant?
- If you are a joint tenant and you become bankrupt, the portion of your home that you own will be transferred to the trustee. The trustee’s name will be placed on the legal title in place of your name. This is to enable the trustee to sell the home.
- The joint tenancy between you and the non-bankrupt co-owner will no longer exist. Instead, the co-owners of the home will be the trustee and the non-bankrupt co-owner. They will then own the home as ‘tenants in common’.
- If the non-bankrupt co-owner would like to stay in the home, they can submit an offer to buy the trustee’s interest in the home. If the trustee accepts the co-owner’s offer and the purchase is made, the co-owner will become the sole owner of the home.
- If the non-bankrupt co-owner does not wish to stay in the home or they cannot come to an agreement with the trustee for the sale of the home, they will need to cooperate with the trustee to sell the home on the open market.
- If the co-owner does not cooperate with the trustee, the trustee can ask the court to appoint a ‘statutory trustee for sale’. Appointing a statutory trustee will force the sale of the home. This may occur even if the non-bankrupt co-owner is financially stable and has not contributed to the bankruptcy in any way.
The application could expose you to higher personal financial risk.
Some ways this may happen:
- Higher legal costs that you may have to pay personally.
- If your company is suing another party (ie. your company is the plaintiff), the other party (ie. the defendant) may apply for assurance that their legal costs will be paid with a security for costs application. A security for costs application may request that you personally guarantee you’ll pay their legal costs if you lose.
- If you’re applying because your company can’t afford a lawyer, this may raise concerns about the company’s solvency, and whether you’re meeting your legal duties as a director. There are serious legal risks for a company trading while insolvent, and for directors not meeting their duties.
Things to be aware of during the sale process
How long will selling the home take?
Once a trustee has decided to sell the home, they will typically do so in a timely fashion.
Can I stay in my home while it is being sold?
Usually, if you are bankrupt, you are not expected to immediately move out of your home. In normal circumstances, the trustee will give you a few weeks to make alternative arrangements.
In some cases, the trustee may allow you to stay in your home during the selling period, provided you assist with the sale process, contribute a fair rent and maintain the home.
What happens once the home is sold?
How are the proceeds of sale distributed?
If you are the sole owner of your home, your secured debts (for example, a mortgage) are paid out first from the sale proceeds. The remainder of the sale proceeds are then given to the trustee to pay your unsecured debts and trustee fees and charges. Any remaining funds after this distribution will be given back to you.
If the home is owned by two or more people, your secured debt (for example, a mortgage) will still be repaid first. However, any remaining funds will then be divided in proportion between the co-owners. The trustee can then use your portion to pay off your unsecured debts.
Example
Mary and Adam own a home valued at $200,000. The home is held between Adam (the bankrupt) and Mary (the non-bankrupt co-owner) as joint tenants.
If there is a mortgage worth $50,000 over the home, the remaining share of equity held between Adam and Mary is $150,000. Adam’s share of the equity is half of this, that is, $75,000. If the trustee sells the house, they can use that $75,000 to pay Adam’s unsecured creditors.
However, Adam and Mary are tenants in common and the $50,000 mortgage was only in Adam’s name, the final share of the home would be:
Adam: $100,000 – $50,000 = $50,000
Mary: $100,000 Therefore, the trustee would only be able to use the $50,000 from Adam’s share to pay the unsecured creditors of his debts.
I am a non-bankrupt co-owner: what should I do?
If you are the non-bankrupt co-owner, you should consider the following:
- You may wish to make an offer to the trustee to purchase the share in the home held by the bankrupt before he/she became bankrupt, however bear in mind that the trustee does not have to accept your offer;
- If you have contributed more to the mortgage or the purchase price of the home than the bankrupt co-owner, you should seek legal advice regarding how to protect yourself and recover your portion from the sale proceeds; and
- If the home was security for a debt which is not fully repaid from the sale proceeds, you may be liable to the secured creditor for the shortfall, and you should seek legal advice.
Further reading
“Bankruptcy Guide”, Federal Court of Australia
“What can be taken or sold in bankruptcy?” Australias Financial Security Authority (AFSA)
- Section 116
- Section 120
- Section 121
- Section 129AA
More self-help resources
Bankruptcy and debt agreements – Moneysmart.gov.au
Bankruptcy guide: introduction (fedcourt.gov.au)
What happens to my house? | Australian Financial Security Authority (afsa.gov.au)
This resource was last updated on 27 September 2023. This is legal information only and does not constitute legal advice. You should always contact a lawyer for advice specific to your situation. Please view our disclaimer for more information.
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