Shannon O’Connor
Senior Manager,
Restructuring and Recovery, RSM Australia

One of the main concerns a person has when becoming bankrupt is “what will happen to the family home?”

In accordance with Section 58 of the Bankruptcy Act 1966, the property of a bankrupt vests in the Trustee. The definition of property extends to the family home, including those owned jointly with a non-bankrupt spouse.

The Trustee will assess the bankrupt estate’s interest in the property, including:

• Obtaining a valuation and/or market appraisal for the property.
• Confirming the validity and value of any encumbrances e.g. mortgages, caveats.
• Considering the contributions made to the property by the bankrupt, the non-bankrupt spouse and any other party.

If the Trustee has established that there is equity in the family home, they will usually write to the non-bankrupt spouse (regardless of whether they are a co-owner or not) and invite them to put forward a proposal to acquire the bankrupt estate’s share of the property.

At this point, it is suggested that the non-bankrupt spouse seek their own separate advice as to the implications of making such an offer.

When deciding whether to accept an offer, the Trustee will consider the amount they could receive if the property were placed on the open market for sale.

If the trustee believes that the offer is not appropriate in the circumstances, they do not need to accept the offer.

If no agreement can be reached between the Trustee and the non-bankrupt spouse, the Trustee can apply to the Court for the power to sell the property.

The Trustee would then distribute the net sale proceeds to the bankrupt estate and any co-owners. In practice, Trustees will usually prefer to reach an agreement with the non-bankrupt spouse as this normally results in the best possible outcome for all stakeholders.

The Trustee may also make a claim to the property because of:

• Transfers of property made before bankruptcy from the bankrupt to other parties for consideration less than market value (“natural love and affection” is not a consideration).
• Contributions made by a bankrupt to property not registered in their name.

In El-Debel v Micheletto (Trustee) [2021] FCAFC 117, the Full Federal Court upheld a claim by the Trustee that properties registered in the names of related entities were held on resulting trust for the bankrupt.

Bankruptcy and the family home … and Family Law

If the Trustee is interested in a Family Law proceeding insofar as there are vested assets, for example equity in the family home, the Trustee may decide to become a party to the proceeding, but they are not required to. The proceeding remains between the non-bankrupt spouse and the bankrupt, but the bankrupt is now limited to dealing with the non-vested assets e.g. superannuation.

Often the Trustee will separately reach an agreement with the non-bankrupt spouse regarding the family home.

This agreement will be incorporated into any orders made between the parties. In these circumstances, the Family Court will usually ask for a letter from the Trustee to confirm they are satisfied with the orders being made.

For Further information, contact RSM here.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Director’s Indemnity Agreement - Compulsory Insurance
• Director’s Indemnity Agreement - No Insurance
• Company (ELodgement)
• Family Trust

Related webinars:

• Webinar On Demand - Introduction to Family Trusts - the basics