Under section 58 of the Bankruptcy Act 1966, an individual’s property including the family home, lies in the hands of the bankruptcy trustee once they are declared bankrupt.
This trustee holds certain obligations to discharge and salvage the ownership of property for the bankrupt estate’s benefit. Section 116 of the Bankruptcy Act limits what property the bankrupt individual my hold and what is to be distributed out to creditors. This is the point where jointly owned property such as the family home can become confusing and harrowing to handle. Here, what is known as ‘the legal doctrine of exoneration’ applies.
The doctrine of exoneration alters respective interests in real property ownership. It is one of the only methods by which a spouse can gain equitable share of the family’s property in the case of the other spouse declaring bankruptcy.
Notably, the doctrine is only applicable when considered with the relevant particulars of a matter. Hence, a person should always retain adequate details of their property and monies tied to it; as this will be highly helpful when a non-bankrupt spouse asserts a claim over the bankrupt spouse.Further, the doctrine only applies based on the number of parties who are registered owners of the real property, where monetary loans were secured against the property and it was used only for the benefit of some owners as opposed to all. To illustrate this, we have provided an example as below:
Adam and Elizabeth have a mortgage on their jointly owned house. The mortgage is for both their benefits. However, Adam undertakes a further loan for his own benefit, and secures it against the house. Under the doctrine of exoneration, Adam’s additional loan is solely for his benefit. Therefore, Elizabeth’s interest in the property’s equity is adjusted to reflect this. The doctrine applies in any such similar instance between co-owners regardless of relationship status (marriage, family members or de facto partners).
Therefore, if and when a person becomes bankrupt, they should consider whether the doctrine of exoneration applies to their property. It is vital that they retain and maintain documents/records for the property and further evidence the intentions or dealings of the parties to the property.
If you require any assistance in relation to bankruptcy and property, or think this situation may apply to you, why not contact our team of experienced accountants and lawyers by clicking here to submit an online enquiry form, calling us on 1300 QUINNS or alternatively, +61 2 9223 9166 to arrange a teleconference or appointment.