Legal Tip 143: Bankruptcy and Bank Loans

When someone becomes bankrupt the trustee in bankruptcy (TIC) will step into the shoes of the bankrupt. The TIC will become the legal owner of the bankrupt's property.

Usually the TIC will sell the property. If this happens any loan secured by the property will be paid out and the proceeds from the sale will be used to pay creditors.

Example
John owns his main residence worth $1mil. He has a loan of $800,000 to Westpac who have a mortgage over the property. John becomes bankrupt because of a court case involving a defamation matter. He has a judgement against him for $500,000.

A TIC will be appointed and will become the owner of the property. The TIC will sell the property and pay Westpac $800,000 and take the remaining $200,000 and use it to first pay their (hefty) fees and then pass it on to unsecured creditors.

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But sometimes the TIC will not sell a property if there is no equity in it.

Example
As above John owns $800k to Westpac, secured by a mortgage. but the property has dropped in value to $850,000. The TIC may decides not to sell as due to the selling costs may not realise any cash from the sale. The TIC may wait. If the property grows in value the property may be sold later and more cash extracted.

Could Westpac force a sale in this instance? I don't think so because any clause in a mortgage agreement allowing this would be void because of s302 of the Bankruptcy Act.

Westpac could also force a sale if John defaulted on his loan agreement