Legal Tip 181: Jointly owned Property and Bankruptcy

Jointly owned Property and Bankruptcy

What happens when one owner of a property becomes bankrupt?

Well the other owners end up owning the property with the Trustee in Bankruptcy.


Example

Homer and Marge own 123 Smith Street which is their main residence.

Homer becomes bankrupt because his Mr Plough snow removal business failed as summer came. Upon bankruptcy the Trustee in Bankruptcy steps in Homer’s shoes and now becomes the legal owner of all of Homer’s assets. Since Homer only owns half the house and Marg owns the other half, she is not directly affected – Marge will own her 50% with the Trustee.


If the property was held as Joint Tenants, this would be immediately severed and become Tenants in Common in equal shares.


What would happen next will depend on the amount of equity. There are 3 possibilities

a) Nothing just yet

b) Marge will be asked to buy out Homer’s share at full market value, or

c) The property will be sold if Marge could not buy out Homer


The Trustee’s job is to maximise the return for creditors so they would not want to wait. But if the value of the property is the same of less than the loan then it may not be worthwhile selling as there would be nothing to come out for the creditors. Waiting 2 years or so may see some growth in the property and some equity may build up.


Note that the Trustee in Bankruptcy takes the property subject to any equitable interest – such as a constructive trust or a resulting trust. For example if Marge had paid 100% of the purchase price originally she might be able to argue that Homer held his 50% as trustee for her.

 

Good summary @Terry_w. Also worth mentioning that even if the property was wholly owned in the wife’s name, the Trustee can and will likely still claim 50% of any equitable interest (market value less loan) due to constructive trust etc.
If husband drew on the mortgage for his business, wife can also use Doctorine of Exoneration to minimise Trustee’s claim - essentially saying he had the benefit of the funds and she too is entitled to an equal amount before calculating what the Bankrupt’s 50% equity share is.

 

Yes worth pointing out D.

See also Legal Tip 108: What is a Constructive Trust?