WHAT HAPPENS TO THE HOUSE WHEN A SPOUSE GOES BANKRUPT?

I am often asked by Family Law clients, “What will happen if my spouse goes bankrupt? Will I lose my share of the house?
Much depends on the particular circumstances surrounding the debt and the reason it was incurred. However, it does not automatically mean that a joint owner of property will lose their interest to a bankrupt estate. A recent decision in the Federal Magistrates Court of Australia demonstrates how all is not lost.
The wife commenced proceedings for a property settlement in the Federal Magistrates Court. The husband at the time was bankrupt and so the Trustee in Bankruptcy was a Respondent in the proceedings.
At the time of the hearing the wife was aged 51 and the husband was aged 54. The parties were in a relationship for a total of 21 years. They had 7 children throughout the course of the relationship. At the time of the hearing the 3 youngest children were living with the wife.
In August 1996, the husband and wife jointly obtained a loan from RACV for the purchase of a motor vehicle. In September 1997 they jointly purchased the matrimonial home. The wife contributed to the purchase of the home from a compensation payment received by her and the balance was borrowed.
In June 2002 a judgment was obtained against the husband by RACV. The parties separated in September 2004 and in February 2006, the husband was served with a bankruptcy notice filed by RACV. In August 2006, the husband was made bankrupt and trustees were appointed. The trustee’s lodged a caveat over the matrimonial home.
The effect of the bankruptcy of the husband was that any jointly owned property with the wife was severed so that the trustee held the property as tenants in common equally with the wife.
The trustee sought orders that the former matrimonial home be sold and the proceeds of the home be divided evenly between the trustee and the wife. The trustee also sought payment of their costs totalling $60,000.00. The judgment obtained against the husband was $10,000.00.
The house was valued at $210,000.00 and was subject to a mortgage of $120,000.00. The wife argued that she was entitled to 95% of the proceeds of the home. Regarding the debt to RACV the wife told the court:
• She signed the contract at the time because she had a good credit rating but nothing was explained to her. She did not know what the contract was about and trusted the husband. She was not a very good reader and did not consider it her loan;
• The debt did not bring any benefit to her or the family. The vehicle was used by the husband alone;
• The husband had failed or refused to service the debt subsequent to separation even though he had employment and the capacity to do so;
• The car had been repossessed and was not available to satisfy the debt;
• The husband had failed to take any steps to minimise losses associated with the debt. He had chosen not to defend the proceedings relating to the debt;
• She had no knowledge of the debt until the caveat was placed over the home.
In finding for the wife the judge said:
“In this case, the trustees have chosen to pursue the former matrimonial home. In doing so they made an economic decision which has seen the costs, for a debt of around $10,000, amount to more than $60,000 and counting. The trustees will no doubt have weighed the interests of the creditors in doing so.
On the particular facts of this case, I conclude that it would not be just and equitable to make orders that would see the wife and the children removed from the former matrimonial home in order to meet what is in large part the trustee’s costs. Looking at the actual orders sought by the wife in the circumstances of this case it is just and equitable that she be able to retain he former matrimonial home’.