Bankruptcy and the family home


If a director of a company has been issued a Director Penalty Notice (DPN) they must act within the 21-day notice period or their personal assets can be at risk, including the family home.

If a director has an interest in the family home (or any other real property), and they do become bankrupt, it can become available to the ATO to meet the obligations incurred by the director not acting within 21 days to remit the personal liability arising from the DPN. This is because a home is not a protected asset under the Bankruptcy Act. If there is equity in the property after paying out any proper mortgage and selling costs, the bankruptcy trustee is obliged to realise (i.e. sell) the property.

Where there is no equity in a property and the debts secured against the property are greater than the current property value, the mortgagees may exercise their rights and sell the property.

If mortgagees don’t exercise their rights, the bankrupt—and possibly other parties—can continue to service the loan. It is important to understand that the property vests in the bankruptcy trustee at the time of bankruptcy and remains vested regardless of whether the bankruptcy trustee takes action to sell the property, or when there is no equity in the property. The property also remains vested in the bankruptcy trustee when the bankrupt has been discharged from bankruptcy.

The bankruptcy trustee may review the property’s equity position periodically. They can realise any equity generated after the date of bankruptcy, even if that equity is generated by the bankrupt or another owner continuing the mortgage repayments. The Mortgage repayments attributed to the bankrupt’s share are deemed to be rental payments to use and occupy the property.

Where the bankruptcy trustee is the only owner, they can put the property up for sale. Where there is a co-owner, the bankruptcy trustee will usually take the following approach:

  1. Give the co-owner the opportunity to buy the estate’s interest in the property.
  2. Invite the co-owner to join the bankruptcy trustee on agreed terms to market and sell the property.
  3. Ask the court to appoint a ‘statutory trustee for sale’ over the co-owner’s interest to force a sale of the property, if there is no agreement to sell the property with the bankruptcy trustee.

The appointment of a statutory trustee forces the sale of the home, even if the co-owner is solvent and has not contributed to the bankruptcy in any way. While the court will often try to soften the effect of such an order by allowing the co-owner time to relocate, the outcome is that the property will be sold.

If you have been issued with a DPN or someone close to you has, you should take action immediately and seek professional advice. You can start with your Accountant, and they may also involve an insolvency specialist.

Don’t wait and think you won’t incur the wrath of the ATO or the liquidator they appoint.



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