What happens to my house?

8 min read

When you become bankrupt, your trustee becomes the owner of your share of any house or property that you own. This means your trustee now has control over the property and can sell it to help pay your debts.

Property may include your:

house
apartment
land
farm or business premises.

Your trustee determines how to deal with the property. They may investigate:

the value of the house
how much you owe to creditors
what the creditors intentions are with the property
the number of co-owners and their intentions.

Houses with a mortgage

If you have a mortgage over your house, this is a secured debt. If you fall behind on your repayments, the secured creditor (your bank or lender) can repossess and sell your house. You may need to contact the creditor to discuss what your position is.

What if there is no equity?

No equity means that you owe more to the creditor than the house is worth.

For example: you owe $400,000 to the bank on your mortgage, and the current value of the house is $320,000. This means you have no equity in the property and owe $80,000.00 to the bank.

Your trustee or a secured creditor can still make a claim against your house, even if there is no equity.

What happens if I jointly own a house?

If you own a house with another person or people, your trustee becomes the owner of your share. You will no longer have any legal capacity to deal with the house. The co-owner won't be able to deal with the property without your trustee’s consent.

If the co-owner is also bankrupt, they may have:

the same trustee (who then owns 100% of the house) or
another trustee (each trustee then owns a share).

If the co-owner is not bankrupt and wants to keep the house:

they can submit an offer to your trustee to purchase the share you owned before you became bankrupt.

Some things to consider when proposing an offer:

It should reflect what the trustee would get from selling the property on the open market.
Your trustee doesn't need to accept the offer simply because it is from a co-owner.
Your trustee has a duty to seek the best financial benefit for creditors.

If all parties are not able to agree, your trustee may take legal action to proceed with the sale. If the court grants permission to sell the house, the trustee can use the proceeds to pay the sale costs. The trustee will divide any remaining money with the co-owner based on their share of ownership.

The co-owner may be liable for any outstanding debt owing to the secured creditor after the sale. You and the co-owner may wish to seek independent legal assistance regarding your legal standing.

Case study: Ramesh

Jointly owning a house and becoming bankrupt

Ramesh is a 67-year-old retired golfer. Ramesh and his partner Alex jointly own their house in Victor Harbor, South Australia, and are paying off a home loan.

In addition to his share of the home loan, Ramesh owes $90,000 of personal debt to several creditors.

Ramesh felt overwhelmed by his debts, and spoke to a financial counsellor about his options. Ramesh decided to apply for bankruptcy. His trustee is the Official Trustee (AFSA).

When Ramesh became bankrupt, AFSA automatically became the owner of his share of the house.

From then on, AFSA co-owned the property with Alex.

AFSA contacted Alex to explain some of the options for dealing with the house:

a) Alex could buy AFSA’s share

b) AFSA could sell its share to someone who Ramesh or Alex knows (e.g. a relative)

c) Alex and AFSA could agree to sell the house on the open market.

Alex agreed with AFSA to sell the house on the open market. The house sold for $400,000.

From the sale money, the bank was paid the loan balance of $360,000. Real estate agent fees were $12,000 and this left a balance of $28,000. Alex received half – $14,000. AFSA received the other $14,000, which was used to pay the fees and costs for administering the bankruptcy, and some of the debts Ramesh owed.

*These case studies do not constitute legal or financial advice. You should consider whether the options referred to in the case studies are appropriate for you, and seek advice if necessary, before taking any action.

Will the trustee take my partner’s house?

If you don’t have a financial interest in the house, your trustee is not able to claim it. However, your trustee can investigate your financial interest in your partner's house. This applies even if you are not on the title. If you do have a financial interest in the house, your trustee may take action to claim your share.

Your trustee may ask your partner for evidence that supports their claim as sole owner of the property including:

if you live in the house
whether you contribute to the mortgage
if you financially contribute to other joint expenses
when your partner acquired the property
when your relationship started
intentions of you and your partner over time.

Will the trustee come to my house and take my stuff?

You will normally be able to keep most everyday household items. You need to disclose all items of value in your bankruptcy application. Your trustee can sell items of significant value or above a set amount.

What happens to my house when my bankruptcy is over?

Your trustee will retain a legal interest in your house even after your bankruptcy ends. Trustees will regularly recalculate equity in a property to determine if there is value in selling the property to repay creditors. If there is a significant increase in available equity, from paying down a mortgage over a long period of time or an increase in overall property value, the trustee may sell the house and realise the asset even after your bankruptcy ends.

If there is an increase in equity in the property, a trustee may attempt to sell their legal interest to any co-owner of the property or sell the property in the open market to gain a return for creditors.

There are limits that apply to the amount of time your trustee has to deal with the property. The time limit is generally six years from discharge from bankruptcy, however there may be variations depending on your circumstances. Contact your trustee for more information.

How do I remove a caveat?

When you become bankrupt and own property, your trustee may either:

lodge a caveat against the property to reflect their interest or
transfer the land title into your trustee's name.

Your trustee does this through the local state or territory land titles office.

Normally, to remove a caveat, the same party who lodges it needs to make a request. Alternatively, a court can order the removal. If you require further information about any caveats, you need to contact your trustee to discuss.

What happens to the money when the trustee sells my house?

Proceeds of the sale of your assets go towards paying:

your mortgage
other creditors in the bankruptcy
outstanding fees and charges owing to your trustee.

If there is a remaining balance after paying these costs, your trustee will return it to you. If you still owe money (shortfall) after the sale, you can list this debt in your bankruptcy.

What if someone else’s house forms security for my debts?

If you fall behind on your repayments, the creditor can repossess and sell their property to pay your debts. For example, in order to secure a loan, your parents offer their house as security.

Houses you sell or transfer before bankruptcy

Your trustee can investigate assets that you owned previously, including houses that you sold prior to your bankruptcy. The trustee may be able to reverse the sale, recover proceeds and sell the house for a fair market price.

Situations where this may apply:

You gave away a house for little or no money (including to a spouse).
You sold it for less than it was worth.
You sold the house and gave the proceeds to somebody else (other than your creditor).

Example
John owned a house. In 2011, he transferred ownership to his girlfriend Lisa in return for her 'natural love and affection'. Lisa did not pay any money for the house. John went bankrupt in 2012. The trustee finds that the house is now worth $500,000. There is still a $200,000 mortgage. This means the house has $300,000 equity. The trustee can reverse the transfer of the house to Lisa. They can then sell the house and pay off the mortgage. After paying the costs of sale, they can use the remaining proceeds to pay John's creditors.