The family home and bankruptcy
Last updated 2 November 2022
Last updated 2 November 2022
This fact sheet 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:
Bankruptcy is a legal process through which you are declared unable to pay your debts when they fall due. You may file for bankruptcy (voluntary bankruptcy), or alternatively, creditors can apply to have you declared bankrupt. If you are declared bankrupt by either of the above means, you will be removed from managing your own finances, and a trustee will be appointed to manage your money and assets.
The purpose of this fact sheet is to explain what will happen to your home when you or a co-owner become bankrupt.
The home is not always sold. Whether or not the home is sold depends on your individual circumstances. The trustee will consider factors such as:
Usually the trustee will only take action to sell the home if there is equity in the home.
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.
If there is equity in the home, the trustee will apply to have their name replace your name on the Certificate of Title. As such, ownership of your share in the home will be transferred to the trustee.
If there is no equity in the home, the trustee may not sell the home. However, the trustee will usually lodge a caveat to prevent you or the non-bankrupt co-owner from attempting to sell or mortgage 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.
Certificate of Title is the official certificate of ownership of the home. It states who owns the home.
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).
Most homes have a mortgage over them, meaning the mortgagee (a bank or lender) is able to take possession of the property in certain situations. The most common reason for banks to repossess homes is failure to meet the mortgage repayments. However, most mortgage contracts also allow the mortgagee to step in and sell the home if one or all the co-owners become bankrupt. Typically, mortgagees will leave the sale of the home to the trustee.
If your home was purchased with protected money, it cannot be sold by a trustee to pay off your debts.
Protected money includes certain superannuation funds, insurance policies and workers compensation payments.
The process for selling the home will depend on whether your home is held in sole ownership or co-ownership.
Sole ownership means that only one person owns the home.
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.
For property owned in NSW, if you have a copy of the ‘Transfer of Land Form 01T’ (from Land and Property Information), it will state whether you own your home as joint tenants or tenants in common in the ‘Tenancy’ section.
You are a joint tenant if you:
You are a tenant in common if:
Trustees will typically sell the home in a timely fashion. Generally, an individual remains bankrupt for 3 years. Trustees are required by law to sell a home within 6 years after an individual’s bankuptcy ends. This allows 9 years to arrange the sale. If the trustee does not sell the home within this period, ownership of the home could be returned to the individual.
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 to take possession and sell the home.
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.
If you are the only owner of your home, your secured debts (for example, a mortgage) are paid first out of the sale proceeds. The remainder of the sale proceeds are given to the trustee to pay your unsecured debts and trustee fees. Any remaining funds after this distribution will be given back to you.
If the home is owned by two people, your secured debt (for example, a mortgage) will still be repaid first. However, any remaining funds will then be divided in proportion between both co-owners. The trustee can then use your portion to pay off your unsecured debts.
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 in equal shares (i.e. 50/50).
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, if 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
Therefore, the trustee would only be able to use the $50,000 from Adam’s share to pay the unsecured creditors of his debts.
If you are the non-bankrupt co-owner, you should consider the following:
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This resource was last updated 2 November 2022. This is legal information only and does not constitute legal advice. You should always contact a lawyer for advice specific to your situation.