What happens to the family home if I file for bankruptcy?

More and more Australians are realising that bankruptcy is actually a valid choice when faced with overwhelming debt.

With more information on how to navigate bankruptcy and with the stigma fading away, thousands of Australians are choosing personal insolvency options like bankruptcy to help them to move on from an unmanageable financial situation. 

One of the questions commonly asked of Registered Bankruptcy Trustees; “If I go bankrupt, will I lose my home?” and contrary to popular belief, losing the family home isn’t always the case when people become bankrupt.

While bankruptcy can sometimes result in property being sold on the open market, there are scenarios where this doesn’t have to happen, but it will depend on the individual circumstances of the person going bankrupt and the value of any property that they have a financial interest in.

Sarah from NSW had sleepless nights before filing for bankruptcy herself “You hear all sorts of stories and the stigma attached.

But when it was explained to my husband and I in simple terms and the figures were shown it was the best option”.

Here’s a quick look at how property can be treated when declaring bankruptcy:

So, you’re considering bankruptcy and you’re worried about your home… what do you do from here?

Let’s say the value of your current home is AU$420,000 and you own AU$380,000 on your mortgage balance, giving you a total of AU$40,000 worth of equity in your property.  

Let’s also say that you and your partner co-own the property equally, meaning you each own half of the equity, which in this example would be AU$20,000 per person.

Assuming you’re the individual filing for bankruptcy, only your share of the property – in this case AU$20,000 worth of the equity - would become an asset of your bankrupt estate.

If the co-owner isn’t bankrupt, they’ll still own their share of the house.

When you become bankrupt, a trustee is appointed to administer your bankruptcy.

Your ownership of assets that aren’t protected (like a house or real estate) shift from you to the trustee and your trustee is then responsible for realising the value of your interest in these assets.

Once the trustee has valued the property, they will write to the co-owner and give them an opportunity to do one of two things:

1. Join the trustee in selling the property on the open market (if it’s commercial to do so), or;
2. Make an offer to buy the property from the bankrupt estate

If option 1 applies, the trustee and the co-owner would join together and sell the property on the open market.

After cost of sales, your share of the proceeds would go towards your bankrupt estate but the co-owner would receive their share of the proceeds as their interest in the property is not an asset of your bankruptcy.

However, option 2 enables couples who co-own property the opportunity to retain the family home.

If the co-owner buys your former interest in the property from the trustee, your home will no longer be an asset of your bankrupt estate. 

The amount that will need to be paid to the trustee will depend on your interest in the property, the value of the home and the equity position.

In the example where there is a combined equity position of $40,000 and half of the property is an asset of your bankrupt estate ($20,000), the co-owner could offer to buy the trustees interest in the property for $20,000.

The money paid to the trustee with option 2 will be made available to your bankrupt estate in the same way that the proceeds from selling the house would be made available to your bankrupt estate with option 1.

Should the co-owner not have their own funds to purchase the property from the trustee, they could consider financing or arrange for a personal loan from family or friends.

Alternatively, some registered trustees like Aravanis, may be able to enter into an arrangement where the offer from the co-owner is paid over instalments – in certain situations, this arrangement could span up to three years. 

Susan from Victoria, was worried about losing her home before she filed for bankruptcy, “My biggest fear was that we would lose the house and have nothing. When we realized that the house was not going to be sold and understood the process because our trustee guided and explained every step, we were relieved”.

It’s important to understand that it’s not always possible to avoid the sale of property when you’re bankrupt but for many people, their circumstances can make it possible with the help of a non-bankrupt person e.g. a co-owner.

If you’re thinking about bankruptcy and own property, consider talking to a registered bankruptcy trustee firm who can walk you through the options that might be available for free.

By Andrew Aravanis, Principal Registered Trustee at Aravanis

About Guest Expert Apart from our regular team of experts, we frequently publish commentary from guest contributors who are authorities in their field.