What happens to real property (e.g. your house) in bankruptcy?

When a person goes bankrupt, their interest in any real property will become divisible property in their bankrupt estate and “vests” in their bankruptcy trustee. In other words, the rights to deal with the property and effective ownership transfers to their bankruptcy trustee who will have an obligation to sell it.  

What happens to any property after a bankruptcy has finished and the bankruptcy trustee hasn’t dealt with the property?

Upon being discharged from bankruptcy, some of the immediate benefits are:

• You no longer require the consent of your trustee for overseas travel.

• Your income is no longer subject to income contribution assessments.

• You can be a company director again.

• You no longer have to pay most of the debts you owed when you went bankrupt.

However, ownership of any real property which vested in the bankruptcy trustee at the date the bankruptcy began will remain with the bankruptcy trustee.

What if there is a mortgage over the property?

A trustee might not sell a property if the outstanding balance of the mortgage exceeds the market value of the property. In this scenario, when there is a shortfall and no equity, a bankruptcy trustee will still retain the right to deal with the property even if the property isn’t sold right away.

If the market value of the property becomes greater than the outstanding mortgage (and any other secured debts), thus causing the property to have equity of some value, a bankruptcy trustee will generally seek to sell the property to “realise” its equity.

What usually happens to property in bankruptcy?

As a bankruptcy trustee is obligated to sell property that vests in them, there are generally three common outcomes:

• The bankrupt’s interest in the property could be sold to a co-owner for the fair market value of their equity in the property.

• The bankrupt could purchase the equity in the property from the bankruptcy trustee after they have been discharged from bankruptcy.

• The bankruptcy trustee may engage a real estate agent to sell the property on the open market.

What options are available?

If a bankrupt would like to retain their property and avoid having it be sold by their bankruptcy trustee, they can:

• If discharged from bankruptcy, negotiate with their bankruptcy trustee to purchase the equity in the property and have the title transfer back to them.

• If currently bankrupt, negotiate with their bankruptcy trustee to arrange for a spouse, family member or co-owner to purchase the property.

Contact us for assistance

If you are currently or have recently been bankrupt and require assistance to negotiate with your bankruptcy trustee in relation to purchasing back an interest in property, or would simply like to discuss the contents of this article, contact us at our Brisbane or Gold Coast offices.