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Reduce the risk of losing your home in bankruptcy: Steps to save your home

If you own a home and you’re facing bankruptcy, not losing it is probably your main concern.

For business owners, proper structuring is the best way to protect your home. However, if you already have accrued debts which you can’t pay, it’s too late to consider such measures, but you can still save your home from bankruptcy.

In this case, you may need to refinance or sell your home to pay your debts. Otherwise, you’re at risk of bankruptcy and having your house sold by your bankruptcy trustee anyway.

If you have unmanageable debts but want to try to keep your home, understand how to navigate the options available BEFORE and DURING bankruptcy – before it’s too late!

The typical bankruptcy scenario

Often, a bankrupt who owns property has been the director of a small business which has failed, leading to personal liability for substantial debts. The property is often jointly owned with a non-bankrupt spouse (husband, wife, etc.)

People usually know when they are can’t pay their debts in full. But they also want to avoid bankruptcy and losing their home.

Understanding the options in between can be difficult without help.

Don’t be tempted by illegal activity

Prior to bankruptcy, you may consider (perhaps on the word of an unqualified advisor) simply transferring your interest in the property to the co-owner or someone else.

Generally, the transfer is for no value, or less than fair value.

This seems relatively straightforward. However, where property is transferred in this way within the five years prior to bankruptcy, the transfer is considered void.

A bankruptcy trustee can reverse such a transaction to recover the transferred property interest.

It is also important to note that these actions can result in criminal ramifications. If a bankrupt disposes of property within 12 months of going bankrupt with the intent of defrauding creditors, such action is liable to imprisonment of up to five years.

How to save your home BEFORE bankruptcy

Reduce the risk of losing your house in bankruptcy by taking one of the following options before going bankrupt:

1. Refinancing;

2. Selling your interest to the co-owner, a family member, or a friend;

3. Negotiating settlements or paying by instalments if the available funds aren’t sufficient to meet your debts in full.

If selling to the co-owner, a family member or a friend, ensure the sale is for fair value and the purchase price is paid.

Such a sale can be subject to the existing mortgage. In this case, the family member or friend will just be purchasing the equity interest (value less mortgage). Stamp duty may be payable by the purchaser on the transfer.

How to save your home DURING bankruptcy

If nothing is done prior to bankruptcy, you can still save your property in bankruptcy.

Property automatically vests in a bankruptcy trustee upon their appointment. This means that they will be registered on the title and can stay there for six years after bankruptcy ends (nine years total) or longer.

If you reduce the mortgage balance, or the property increases in value, the trustee will receive this benefit. It is therefore crucial to act quickly if you want to arrange a related purchase of your property interest from your bankruptcy trustee.

The trustee will usually give the co-owner the first opportunity to purchase the bankrupt estate’s equity interest in the property. Otherwise the trustee will seek to agree with the co-owner to list the property on the market.

If no agreement can be reached, the trustee may apply to court for a statutory trustee to sell the property.

Even if there is no or minimal equity in the property, the co-owner can seek to remove the trustee from the title by purchasing the bankrupt estate’s interest for a nominal fee. This means that the co-owner will then benefit from their mortgage payments and any increase in property value.

Adjusting ownership interests – when 50/50 isn’t equal

Title does not necessarily represent the owners’ shares. The ownership interests can be adjusted from an area of law called equity due to:

  • Larger financial contributions to the purchase price, maintenance or improvement of the property by one of the parties, may lead to a constructive trust;
  • The doctrine of exoneration principle.

Firstly, larger contributions to the property by one owner can result in them being deemed to have  a larger interest than that recorded on the title.

Secondly, a doctrine of exoneration adjustment can be made where borrowings secured against the property were used for the benefit of only one owner.

Example:

A husband borrowed $200,000 from a bank to invest in his business. The bank secured the loan with a mortgage against the property he jointly owned with his wife.

The husband’s business failed and due to personal guarantees he’d granted, he went bankrupt. His bankruptcy trustee is selling the property.

The property is worth $400,000 and a $100,000 home loan as well as the $200,000 business loan are mortgaged against it, meaning there is $100,000 equity. On a 50/50 basis the trustee and the co-owner would be entitled to $50,000 each. However, the bankrupt’s wife could claim that the $200,000 bank loan be paid just from the husband’s half interest in the property, therefore leaving all surplus funds to her, as follows:

 
Funds Distribution Based on Title %
$
Funds Distribution with Doctrine of Exoneration Adjustment
$
House value
400,000
400,000
Less: home loan
(100,000)
(100,000)
Less: business loan
(200,000)
(200,000)
Equals: net equity
100,000
100,000
Bankrupt’s interest
50,000
0
Co-owner’s interest
50,000
100,000

Are you concerned about losing your house in bankruptcy and need advice on how you can protect it? Contact one of our professional advisors here to give yourself the best chance of saving your home…

 

 

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