What happens to my house in bankruptcy?

What happens to my house in bankruptcy?

As a general concept, once you become bankrupt your assets “vest” in your trustee. This means that the trustee stands in the bankrupt’s position and can take control of and sell assets for the benefit of creditors with the exception of some assets such as superannuation and other assets.

The most common enquiry we encounter is – what happens to my family home? Quite often a matrimonial home is owned by the bankrupt and their spouse and this can cause families some distress while trying to understand how a trustee will deal with the family home whilst one of the two proprietors is bankrupt and the other is not.

Trustee’s Course of Action

In practice, the trustee will undertake the following:-

• Secure the bankrupt estate’s interest in the property by registering a caveat on the title of the property or transferring title in the property to the trustee;
• Calculate the equity available in the property; and
• If there is equity available, the trustee will take steps to realise the equity in the property.

Equity Calculation

The trustee will calculate the equity available in the property by obtaining a formal valuation from a qualified valuer and ascertain the amount owing to secured creditors who have registered a mortgage or caveat on title of the property.

After deducting the amount owed to secured creditors from the valuation amount, the trustee may allow a commercial amount for selling costs and marketing expenses. The residual amount after deducting these expenses is considered the equity available in the property for the benefit of creditors.

Sale by the trustee to the joint proprietor/family member

If a bankrupt owns a property jointly with another person, which is quite often their spouse, the trustee stands in the bankrupt’s position and owns his/her share in the property.

After calculating the equity, the trustee will liaise with the bankrupt and explain the following options:

1. The joint proprietor can purchase the estate’s interest in the property; or
2. A relative or other family member of the bankrupt can purchase the estate’s interest in the property; or
3. The trustee and the joint proprietor can agree to sell the house on the open market.

Quite often the joint owner wishes to retain the property and elects to proceed with purchasing the estate’s interest. This is the most cost effective and efficient way of realising the estate’s interest in the property.

But what happens if the joint proprietor or a relative can’t purchase the estate’s interest?

Selling the property

If a joint proprietor or family member is unable to purchase the estate’s interest in the property, the trustee and the joint proprietor can agree to sell the property together on the open market.

In this instance, both parties would work together to sell the property. A real estate agent would be appointed to undertake a marketing and sale campaign and the joint proprietor would be entitled to receive half of the net proceeds after deducting the agent’s costs and commission and the amounts owing to secured creditors.

Other Factors

Whilst the above scenarios are relatively straightforward, there are a number of other factors that a trustee may need to consider before realising the estate’s interest.

Some of the factors that are considered are:

• Whether the bankrupt has contributed to the purchase and upkeep (such as mortgage repayments) of the property that is higher than the amount recorded on title.
• In the event that the property was purchased before bankruptcy using exempt property (like proceeds from a personal injury claim), the trustee would not have a claim to the property.
• The doctrine of exoneration may exonerate (release) some parties from certain debts. This concept will be discussed in a separate article.
• Family law matters quite often can reduce the claim of the trustee to the family home.


Whilst there are a number of factors for a trustee to consider, there are a number of options available to joint proprietors and family members to retain the family home or other property in bankruptcy.

We would recommend that your clients obtain specialist advice regarding some of the matters discussed in this article and as always, the team at Romanis Cant can assist your clients through this process.