Trustee in Bankruptcy Family Law

Trustee in Bankruptcy Family Law

Trustee in Bankruptcy Family Law


During the current economic climate, more and more people are asking what happens with a trustee in bankruptcy and family law proceedings.

You may be considering declaring bankruptcy to help move forward from unmanageable debt.

For most people filing for bankruptcy, one of the most common concerns they have is whether they will have to sell the family home.

Declaring bankruptcy does not have to mean losing the family home, particularly if you co-own the property with your spouse or another party who is still financially solvent.


Declaring Bankruptcy in NSW


Bankruptcy is a legal process whereby someone is declared unable to pay their debts.

According to the Bankruptcy Act 1966, declaring bankruptcy in NSW can happen one of two way.

The first is when a creditor or other interested party to who the person in question owes money makes an application to the court to have that person declared bankrupt. When this occurs, it is known as involuntary bankruptcy.

The second is when the person in question (the debtor) chooses to file a debtor’s petition after realising they are in severe financial difficulties. This is known as voluntary bankruptcy.

Whether a person is declared bankrupt through voluntary or involuntary measures, the resulting actions will be the same.

A trustee will be appointed to take control of the debtor’s assets, some of which will be sold to cover the debtors’ financial commitments.

When someone is declared bankrupt, certain assets are exempt from being sold off.

A debtors’ family home may or may not be sold off to pay their debts depending on several factors, including who else has equity in the home, how much equity there is in the house and the debtors’ relationship to the co-owner .


Can a Trustee in Bankruptcy Family Law Go After the Family Home?


When someone becomes bankrupt, the appointed trustee in bankruptcy family law becomes the owner of the debtors’ property, including their share of the family home and any investment properties. Whether or not the family home will be sold during the process of bankruptcy depends on the debtor’s individual circumstances.

Before taking any action to sell the debtor’s property/s, the trustee will conduct a thorough investigation and will usually look at the following factors:

  • The current value of the home in question
  • How much is owed to the bank or mortgagee
  • What the creditor’s intentions are with the property
  • The number of co-owners and their wishes and plans for the property in question
  • The existing equity in the property


What Is Equity?


In most cases, the trustee will only take action to sell the debtor’s home if there is equity in the home.

Equity means that your home is currently worth more than the value of the debts secured against it.

Generally, if there is equity in the home, the trustee will apply to have their name replace the debtor’s on the Certificate of Title. This has the effect of transferring the debtors’ share of the home to the trustee.

If there is considered to be no equity in the home, the home was purchased with protected money or the house is co-owned by a non-bankrupt party, the trustee may not sell the home.


Sole Ownership


The process for selling a family home during bankruptcy will depend on whether the house is held in sole ownership or co-ownership.

If only one person owns the home, that is known as sole ownership.

If the sole owner of a home becomes bankrupt, the appointed trustee’s name will be placed on the home’s Certificate of Title in place of the owner.

This enables the trustee to be able to sell the home to pay off the outstanding debts.


Co-Ownership and The Family Home

Where two or more people own a home together, it is known as co-ownership.

There are two types of co-ownership, joint tenants and tenants in common.

Someone is considered as a joint tenant if:

  • They acquired their interest in the home at the same time and in the same transaction as the other co-owners
  • The nature, extent and duration of their interest in the property is exactly the same as that of your co-owner; and
  • They have an equal right to possession of the entire home.

If you are a joint tenant and you become bankrupt, once your portion of the home is transferred over to the trustee, you will no longer be a joint tenant.

The joint tenant will become co-owner of the home with the trustee. They will then own the home as ‘tenants in common’.

In this case, the trustee will give the co-owner, who in many cases will be the spouse of the bankrupted party, the option to buy the trustee’s interest in the home.

If the co-owner has the available funds to be able to do this, they will then own the home in full.

In cases where there is joint tenancy, and only one spouse is declared bankrupt, this is the most likely way that the debtor and their family will be able to continue living in their family home.

If the co-owner is unable to purchase the trustee’s share of the family home however, they will need to co-operate with the trustee in the sale of the property.

If the co-owner does not co-operate with the trustee in such a situation, the trustee can ask the court to appoint a ‘statutory trustee for sale’, which will force the sale of the home.


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