As discussed in Part I<link to Article I>of our three-part bankruptcy series, there are often multiple and complex reasons why debt may start to build up for women.
Reasons can include business cashflow issues and non-payment of invoices to personal circumstances such as divorce, having a family, blending families and even the impact of gambling, which can chip away at cash reserves and lead to mounting debts which become more and more difficult to pay off.
We’ve discussed the effects filing for bankruptcy will have on your income and employment in Part I <link to Article I>, so now let’s talk about your assets and whether you could lose your house or car through bankruptcy.
Property in bankruptcy
A common worry is the possibility of losing the family home in the bankruptcy process. Sometimes, in the right situation this can actually be avoided with the help of a non-bankrupt third party, like a co-owner.
When you become bankrupt, your interest in some assets (like a house for example) aren’t protected and they become an asset of your bankrupt estate. Your bankruptcy trustee will need to realise the value of your interest in the property so that the money can be made available to your bankrupt estate.
Contrary to popular belief, it can sometimes be possible to do this without the trustee selling the property on the open market. Instead, a non-bankrupt third party (like a co-owner) can make an offer to purchase the trustees interest in the property. Let’s look at an example:
Daniel and Sarah jointly own a property which has a current market value of $420,000. Their mortgage balance is currently $380,000. Daniel has recently become bankrupt.
The Trustee will organise for the property to be valued and will contact the mortgagee to confirm the balance of the home loan.
Based on the above information, the total equity in the property is $40,000 (i.e. $420,000 minus $380,000). The property is owned jointly so it may be assumed (if not proven otherwise) that Sarah and Daniel each have a $20,000 interest in the property.Because only Daniel has become bankrupt, only his share of the property has become an asset of the bankrupt estate. The Trustee will write to Sarah (as the co-owner), giving her an opportunity to do one of the following;
Once Daniel’s trustee has valued the property, they will write to Sarah (as the co-owner) and give her an opportunity to do one of two things:
- Join the trustee in selling the property on the open market (if it’s commercial to do so), or;
- Make an offer to buy the purchase the trustee’s interest (Daniel’s former share) in the property
If option 1 applies, the trustee and Sarah would join together and sell the property on the open market. After cost of sales, Daniel’s share of the proceeds will go towards his bankrupt estate but Sarah would receive her share of the proceeds as her interest in the property is not an asset of Daniel’s bankruptcy.
However, option 2 enables the couples an opportunity to hang onto the family home. If Sarah buys Daniel’s former interest in the property from the trustee, the home will no longer be an asset of Daniel’s bankrupt estate.
You can view the above example in an animated video here
Vehicles
People often worry they’ll lose their vehicles through the bankruptcy process. Clients often have vivid imaginings of their beloved car being towed into the distance
In many cases, the value of one’s vehicle assets are low enough to ensure action won’t be taken and you’ll be able to continue the school runs and make work by 9am and not have to rely on the bus network.
The important thing to understand is that you don’t just automatically lose your car as a result of for filing for bankruptcy.
Each bankrupt person is allowed to own vehicle assets worth up to a certain value. Currently this amount is $7,800.
Here’s the thing though; while cars are assets, they’re not like houses or other real property in the sense that, they don’t hold or gain value over time. Most of the time, they actually depreciate in value the longer you own them and the more you use them.
If you own vehicle assets (i.e. you own them – they aren’t under finance) worth more than the threshold, the following options may apply:
- The trustee could sell the vehicle and, if this was your only vehicle, any proceeds of the sale above the vehicle asset thresholdwill go towards your bankrupt estate. The remaining $7,800 will go back to you so that you can buy another car within the limit of the threshold.
- In the event that you want to keep this particular vehicle, the trustee needs to be paid the excess amount. A non-bankrupt third party (like a partner, family member or friend) can make an offer to pay the trustee this sum of money. Some trustees may even allow for this amount to be paid off over instalments.
To be clear, bankruptcy isn’t a blanket solution for everyone but for some – it’s not the ‘last ditch’ option most people believe it to be.
At Aravanis we’re passionate about helping people get out of tricky spots and bankruptcy can often be a much easier process to go through, than what is portrayed in the media.
This article is part of a three-part series. To find out about the effects of declaring bankruptcy on your income and employment status click here <link to Part I>, to find out common myths around bankruptcy click here <link to Part III>.
