Question: What happens when one owner of a property becomes bankrupt?
Answer: The other non-bankrupt owners end up owning the property with the Trustee in Bankruptcy.
Example: Homer and Marge own 123 Smith Street which is their main residence.
Homer becomes bankrupt because his Mr Plough snow removal business failed as summer came. Upon bankruptcy the Trustee in Bankruptcy steps in Homer’s shoes and now becomes the legal owner of all of Homer’s assets. Since Homer only owns half the house and Marg owns the other half, she is not directly affected – Marge will own her 50% with the Trustee.
If the property was held as Joint Tenants in situations like the above, the joint tenancy would be immediately severed and the owners will become Tenants in Common in equal shares. The bankrupt owners interest would then pass to the Trustee in Bankruptcy.
What would happen next will depend on the amount of equity. There are 3 possibilities
a) Nothing just yet
b) Marge will be asked to buy out Homer’s share at full market value, or
c) The property will be sold if Marge could not buy out Homer
The Trustee’s job is to maximise the return for creditors so they would not want to wait. But if the value of the property is the same of less than the loan then it may not be worthwhile selling as there would be nothing to come out for the creditors. Waiting 2 years or so may see some growth in the property and some equity may build up.
Note that the Trustee in Bankruptcy takes the property subject to any equitable interest – such as a constructive trust or a resulting trust. For example if Marge had paid 100% of the purchase price originally she might be able to argue that Homer held his 50% as trustee for her.
Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au