What really happens to assets in bankruptcy- useful to know
Let’s discuss some of the myths about bankrupts’ property and other assets.
On the basis of these myths, many people believe that if they become bankrupt they’ll automatically lose their homes, can expect to lose their jobs, will no longer be able to get credit, but at least will become debt free.
Should the day ever dawn when expert financial advice convinces you that filing for bankruptcy is your only viable option at a time of financial difficulty, then try to ensure your trustee is someone who you’re also convinced will act in your best interests.
Most importantly, don’t disadvantage yourself at such a stressful time by trying to cope with the situation on the basis of fantasies rather than facts.
Some realities to consider
It’s common for people to believe that as a bankrupt they’ll “lose everything”. In fact, as a bankrupt, certain of your assets are protected, and an empathetic trustee will place you in the best financial position possible during the bankruptcy process.
Assets you can keep as a bankrupt
- People who elect to file for bankruptcy may well be able to retain their residence. As long as payments are made on time, properties aren’t as a rule seized by banks to cover accumulated debt that led to bankruptcy.
- Most personal household items (for example, furniture) is retained by bankrupts, as are the following.
- A motor vehicle used primarily as a means of transport up to the value of $7,500 (indexed amount), excluding any finance owing on the vehicle.
- Tools of trade up to the value of $3,650 (indexed amount) used to earn income (see s116 of the Bankruptcy Act.
- All assets held on trust (for example a family trust or a child’s bank account).
- Your and your spouse’s life insurance policies, and any proceeds received from these policies after being declared bankrupt.
- Compensation received from a personal injury claim and any assets bought with that compensation.
- Awards with sentimental value (for example sporting and cultural medals or trophies).
- Most balances and payments received from regulated superannuation funds on or after the date you were declared bankrupt.
Assets you’re likely to lose:
- If as a bankrupt you can’t maintain mortgage payments and have other significant debts, creditors may contact your bank. These actions could result in your house being sold to settle debts - although you may retain your family home in certain circumstances
- It’s likely you’ll lose stocks and shares you hold
- Your jewelry and certain valuable furniture
- Gifts and inheritances received under a will
- Motor vehicles and tools of trade where their value exceeds specified limits
Undoubtedly having to sell assets will hurt, but an expert trustee will do what has to be done with the prime aim of stabilising your financial situation.
The roof over your head
In bankruptcy, although the trustee will have to sell assets to settle your debts, you may nonetheless still be able to remain in your house. This will depend on ownership structure, your equity in the house, and perhaps the extent of a mortgagee’s willingness to cooperate.
The family home isn’t protected under the Bankruptcy Act, which means you’ll need to face the fact your trustee can sell any equity remaining in the house once a mortgage is paid.
What is your situation relative to the following scenarios based on ownership and equity?
- If you own your house outright and don’t have a mortgage your trustee will help you sell it at market value
- If the house is jointly owned and a mortgage is paid when you declare bankruptcy, your partner can opt to buy your share
- If for whatever reason this doesn’t happen, the house must be sold for market value and the proceeds split between the trustee and your partner.
- Where there’s joint ownership with low equity (for example the house is recently purchased, interest only has been paid on a loan, the property’s value has depreciated) the trustee will sell the equity you own. If the co-owner can buy your share and the mortgage paid, the house can be retained in that person’s name
- If the house is jointly owned, valued at less than the mortgage, your partner may be able to purchase the future equity interest on your ownership share. Because the trustee has no equity to sell, the co-owner of the house must continue to pay the mortgage, and accordingly will own any future equity instead of you
- If you jointly own a house that was used to secure a loan, and because existing equity in the house could be used to take out another loan, your partner may be eligible for “the doctrine of exoneration”. If one of you took out a loan on the house from which the other would in no way benefit (say, for a business) then after the has been sold the equity remaining would go to the co-owner not benefiting from the loan. Eligibility for exoneration depends on a trustee verifying a claim is valid
Be assured of the following
You won’t automatically lose your job or business if you file for personal bankruptcy.
Your employer (or a potential employer) would always be able to seek a credit report on you, bankruptcy is no ground for sacking you or denying you employment. In fact, you could likely make out a case of unethical behaviour and/or discrimination against people who denied you employment as a bankrupt.
Many people believe that bankruptcy will remove all their debt obligations. It won’t. Though it may remove most individual debts, chances are bankruptcy won’t clear many common debts such as HECS loans, unpaid tax, or debts resulting from instances of fraud.
Debt issues in the face of bankruptcy are yet another reason for you to consult a professional adviser in this field.
It’s also common belief that anyone filing for bankruptcy is automatically disqualified from being able to seek credit. Not so.
If you’ve declared yourself bankrupt, do everything possible thereafter to bring your credit score back into the so-called green area. Companies and financial institutions, in considering your loan application, would likely view it favourably should they see evidence that you’ve come out of debt and are working toward saving – even if you’ve previously been bankrupt.
If you’re thinking of filing for bankruptcy, contact a Registered Trustee in Bankruptcy at Macks Advisory. An initial consultation is free.