During bankruptcy, the role of a trustee in bankruptcy is to gather together the bankrupt person’s property and sell it to raise money to repay the person’s creditors.
If you’ve been declared bankrupt and a trustee is appointed to your bankrupt estate, or you’re planning your estate now and are concerned about bankruptcy in the future, it’s important to know what property the trustee can take and sell to pay your creditors, and what property you can keep.
Here’s a run-down of what the trustee can and can’t take if you’re bankrupt.
The law of bankruptcy in Australia is, for the most part, contained in the Bankruptcy Act 1966 (Cth) (“the Act”).
The meaning of the term ‘property’ for the purposes of the Act is very wide and means real or personal property of every description whether situated in Australia or elsewhere. This includes cars, motorcycles, scooters, trailers, boats, caravans, tools, shares and others investments, money, land, houses, apartments, furniture, appliances, jewellery, clothes, artwork, computers, televisions and so on.
So what happens to my property when I go bankrupt and during my bankruptcy?
The general rule under the Act is that:
- all of your property vests in the trustee as soon as you’re declared bankrupt; and
- all property acquired during your bankruptcy vests in the trustee as soon as you acquire it.
However, there are exceptions to the general rule which are explained below.
‘Vests’ is a legal term which means to confer on a person the right of immediate or future legal ownership or interest in land or some other property. As an example, if you own your own home before you become bankrupt, upon becoming bankrupt your interest in your home moves from you to your trustee. Your trustee will then have an immediate right to deal with your home and have the legal title in the home transferred into their name. This means that any rights you used to have in the property now belong to the trustee.
What do you mean ‘all property that’s acquired while I’m bankrupt’?
That’s right, it’s not only the property you owned when you become bankrupt you need to consider but also the property you acquire during the term of your bankruptcy. This includes tax refunds for income earned before bankruptcy, an inheritance from a deceased estate where the distribution is paid after you’re bankrupted and any lottery winnings or competition prizes you win whilst you’re bankrupt.
What property can be sold and divided among the creditors?
The Act separates property into two types: property that’s divisible among creditors and property that’s not. That is, property the trustee can take and sell to repay the creditors and property the trustee can’t take.
Basically, the trustee can take all of your property and sell it to repay creditors unless the Act specifically says otherwise. This is where the exceptions come in.
Property the trustee can’t take and sell to repay creditors is:
- property held by you on trust for another person;
- your personal property that has sentimental value (for example, your wedding ring);
- motor vehicles (including motorcycles, cars, scooters, trucks, trailers, bicycles and boats) you use mainly for transport up to a value of $7,800 (indexed as at 20 September 2017);
- tools you use to earn an income up to a value of $3,700 (indexed as at 20 September 2017);
- money transferred by or for you into a regulated superannuation fund before bankruptcy; and
- most household items of reasonable value (for example, furniture and appliances).
My partner and I own property together, can the trustee sell it?
If you and your partner have a joint property and you go bankrupt, then the trustee will have an interest in your share of the property. For example, if you and your partner own a house together and you each have a 50% share in the house, your 50% share will vest in the trustee as soon as you become bankrupt so the trustee will have a 50% share and your partner will have a 50% share.
In that circumstance, your partner can always negotiate with the trustee to buy your former interest. However, if your partner can’t afford to buy it or your partner and the trustee can’t agree on a price, the trustee can make an application to the court and force a sale of the house. The trustee would then have to pay your partner their share of the proceeds of sale after the mortgage, legal fees and agents fees have been paid.
My partner owns property, is it safe from the trustee?
Just because your name isn’t on the certificate of title doesn’t always mean the property is safe from a trustee. If you’re bankrupt and you’ve made contributions towards the purchase or maintenance of property (including real estate, cars, shares and so on), your trustee can trace those contributions and bring a claim against the owner of the property in respect of those contributions.
Special note: If you’re bankrupt, be careful with your superannuation
Although, a trustee usually can’t take money held in a regulated superannuation fund which was transferred into the fund by or for you before bankruptcy, the trustee may be able to access money held in such a fund in the following circumstances:
- where unusual lump sum payments were made before the bankruptcy in the hope of keeping that money away from the trustee or creditors; and
- where the money is paid out of the superannuation fund after bankruptcy as a pension, in which case it’ll be treated as income and you may have to pay a contribution to the trustee.
If you’re bankrupt and plan on accessing your superannuation fund, be sure you obtain legal advice before you do so.
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