When an individual declares bankruptcy, the trustee-in-bankruptcy (trustee) may able to claim, and sell, some of the bankrupt’s assets. The trustee can then use the proceeds from the sale to repay any money owed to creditors. Assets may include, but are not limited to, real estate, vehicles, tools, equipment, furniture, bank balances and lottery winnings.
One of the key questions for the bankrupt is how they can protect their assets from the trustee or from creditors. This is particularly relevant for the family/matrimonial home. This article explores the options available to a bankrupt to protect their assets in bankruptcy, with a focus on the family home.
The first thing to establish is what property the bankrupt owns, or has an interest in.
Much will depend on how ownership of the property has been structured or what interests exist in the property.
If the bankrupt was a joint owner of the property, upon bankruptcy the trustee becomes the legal owner of the bankrupt’s share in the property. The trustee may (a) lodge a caveat against the property in order to reflect their interest or (b) transfer the land title into their name.
Hence, the bankrupt will no longer have any legal capacity to deal with the property, and the co-owner cannot deal with the property (ie alter, demolish or sell the property) without the trustee’s consent. If the co-owner is also bankrupt, then they may have:
- the same trustee (A) where A then owns 100% of the property, or
- another trustee (B) where A and B each then own a share of the property.
Interest in property
If the bankrupt does not have a financial interest in property (ie has not contributed towards the costs of purchasing the property or paying the mortgage), then the trustee is unable to claim it. However, a trustee may investigate a bankrupt’s interest in their partner’s house for example. This applies even if the bankrupt is not listed on the title. If the bankrupt does have an interest in their partner’s property, the trustee may take action to claim the bankrupt’s share.
Key evidence in establishing a bankrupt’s interest in a property include, but is not limited to:
- whether the bankrupt lives in the house,
- whether the bankrupt contributes to the mortgage,
- whether the bankrupt contributes to other joint expenses (for example bills, council rates, strata levies, maintenance costs, etc),
- when the bankrupt’s partner acquired the property,
- when the relationship between the bankrupt and their partner commenced, and
- the intentions of the parties over time.
There are several ways to attempt to protect the family home in bankruptcy. Some of the more common methods are explained below.
1. Presumption of advancement
The law has historically recognised certain relationships, such as marriage, where it is presumed that a husband intended to gift a property (such as the family home) to his wife. This is known as the presumption of advancement. The presumption is antiquated because it only applies from a husband to his wife, and not to de facto partners, same sex couples or from a wife to her husband.
To rebut this presumption, a resulting trust may arise because it is presumed that the husband (who contributed to payment of the purchase price) did not intend to gift his contribution to his wife. A resulting trust, if established, would create a beneficial interest for the husband.
In a recent Federal Court decision, FC of T v Bosanac (No 7)  FCA 249 (Bosanac) the wife in the proceedings was the sole registered owner of the matrimonial home. She successfully established the presumption of advancement in her favour, despite shared bank accounts and the sharing of other property assets with her husband. Generally, the court will look to the dealings, documents and communications between the parties at the time of the purchase, to determine if there was an intention to create a beneficial interest in the property. However, evidence of dealings between the parties after the time of purchase, may also be relevant. It should be noted that the Commissioner of Taxation has since appealed against the decision in Bosanac with the appeal decision yet to be handed down.
For any parties seeking to rely on the presumption of advancement, it is crucial that, at the time of the purchase, the husband enters into a deed confirming that:
- he is making a gift of the property to his wife,
- he has no beneficial interest in the property and,
- if he is a joint borrower on the purchase loan, he has no rights of contribution against his wife in respect of the loan and the mortgage.
The mortgage payments should also ideally be paid solely from the wife’s income. Finally, in any subsequent financial documents, any disclosures made should be consistent with the wife being the sole beneficial owner of the property.
2. Purchase property in one name
It is often common for property to be purchased and registered solely in the name of the “non-risk” spouse. That is, the majority of the family home ownership (for example, 99%) is given to the spouse who faces less, or no, risk of litigation or other legal “attacks” from creditors.
The spouse facing more risk must still retain some interest in the family home to ensure that the property can’t be pursued by creditors without the authority of both spouses. This approach allows the spouse facing more risk to effectively disassociate themselves from the family home, thus reducing the risk of losing it to creditors.
3. Reduce equity in the property
As the value of the property rises, so too does equity in the property which can then be available to creditors. This risk can be mitigated by undertaking borrowings against the property which will result in a charge over the property. This will ensure that little equity is made available to creditors or any party threatening litigation.
4. Establish a discretionary trust
A discretionary trust for the family home will separate said property, whereby ownership of the property falls under the trust. Separate trusts for separate assets allow parties to reduce their risks and exposure to creditors, whilst also allowing them to maximise on the advantages which a trust offers, such as taxation benefits.
You can read more about protection from creditors’ claims here.
Sources: Australian Financial Security Authority (AFSA), What happens to my house?, accessed 27 April 2021.
AFSA, Assets that can be taken or sold, accessed 27 April 2021.
Lisondra G, How to protect your family home from creditors, My Business, 22 September 2017, accessed 27 April 2021.
Roberts G, Hearnden K, Cooper Grace Ward, Protecting your family home against creditors, 6 April 2021, accessed 27 April 2021.
CCH Pinpoint ®, Protection from creditors’ claims, 12 October 2020, accessed 27 April 2021.
CCH Pinpoint ®, Property available, 17 August 2018, accessed 27 April 2021.
CCH Pinpoint ®, Availability of assets, 30 April 2018, accessed 27 April 2021.
CCH Pinpoint ®, Enforcing possession, 21 August 2018, accessed 27 April 2021.