If I Become Bankrupt Do I Lose my Home?

Bankruptcy Articles > Article: If I Become Bankrupt Do I Lose my Home?

What is bankruptcy?

A bankruptcy occurs when an individual is no longer able to pay their creditors. Bankruptcy can be declared involuntarily or voluntarily. An involuntary bankruptcy is a bankruptcy in which the creditors file a petition for bankruptcy against a debtor. The creditors do this in order to recover a portion of the money they are owed. A voluntary bankruptcy is a bankruptcy in which the debtor files for bankruptcy. This happens when the debtor becomes overwhelmed by their debt and cannot pay their creditors back. Voluntary bankruptcy is more common than involuntary bankruptcy.

What happens to my debts when I file bankruptcy?

There are two main types of creditors that can take action against a borrower:

  1. Unsecured Creditors

Unsecured creditors are creditors that lend borrowers money that is not secured by an asset. Examples of unsecured debt include credit cards, cellular phones, and personal loans. Creditors of unsecured debt cannot take items from the bankrupt party. Once a party files for voluntary bankruptcy, their unsecured creditors are no longer able to contact them to collect the debt. The creditors must lodge a claim with the Court to secure any money they are owed.

  1. Secured Creditors

Secured creditors are creditors that lend borrowers money that is secured by an asset. The money the secured creditor's loan goes directly toward the purchase of an asset (i.e. bill of sale on a car or a home loan). This entitles the secured creditor to take the property back. The creditor can then sell the property if the bankrupt party falls behind in payments. The lender of a car loan, as a creditor, can claim and resell the bankrupt party's car. If the sale price of the property does not cover the amount of debt the bankrupt party owes, the creditor can lodge a claim during bankruptcy proceedings for any loss incurred.

A mortgage is a secured debt. The lender that granted the mortgage is permitted to sell the property if the bankrupt party is unable to meet the mortgage requirements. If you are declared bankrupt, your trustee might sell your home (or property) to find money to pay your creditors.

Unfortunately, bankrupt parties who are not in default on their home loans are still at risk of losing their homes. Even if you were not in default on your mortgage repayments, but were legally declared bankrupt due to the inability to repay another debt, the reality of your bankrupt status is that this can be considered a default under the mortgage.

What if I am the only owner of the home?

If the only name on the mortgage loan is yours, you will relinquish the rights of ownership to your Trustee. Your trustee will then be able to sell your home and use the funds to repay creditors. If the sale does not realize enough money to repay the mortgage, the remaining amount (difference between the sales price and amount owed) will be a debt in the bankruptcy. In the event that there is a profit, the extra money will go directly to your trustee who can reallocate the funds to other lenders.

What if I am a joint owner of the home?

If you are a joint owner in the home and you file bankruptcy, the trustee will have the right to become the 'tenant in common' and take over your share of ownership. The other owner will lodge a caveat on the title to protect the bankrupt party's interest in the house.

The non-bankrupt owner will be given the opportunity to buy the bankrupt owner's share of the home from the 'tenant in common' (the trustee). If the second party can pay for the bankrupt party's share of the home, the money will be used to pay creditors. The non-bankrupt owner will then own the entire house. If the second party cannot afford to pay for the bankrupt party's share of the house, they can agree to sell the home with the trustee. Once the home is sold, the non-bankrupt party and the trustee split the proceeds equally.

If the non-bankrupt party refuses to cooperate with the trustee, the trustee has the option to apply to the Court for an order to sell the property. Once the order is approved and the house is sold, the proceeds will be divided between the non-bankrupt party and the trustee equally.

Can I give someone else my assets before I file bankruptcy, to ensure that I will not lose them?

Under the Bankruptcy Act, it is considered an offense to transfer property (or money) to another person to avoid losing the item to a creditor. The trustee can recover any assets that have been transferred from the bankrupt party to a third party within the five years before filing bankruptcy. The trustee also has similar powers over money that has been paid to creditors. If the trustee feels that one creditor has been treated preferentially, the trustee can claim back payments from them to pay other creditors.

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