Bankruptcy can be an extremely emotional and stressful time, it weighs heavily on the individual as well as on their family. Though entering bankruptcy may release the creditor pressure valve, other issues may rear their ugly heads. One of these issues is risk to family assets. The bankrupt’s spouse may wonder what will become of their beloved family home.
In certain circumstances there may be a light at the end of the tunnel. This light comes in the form of the Doctrine of Exoneration. At de Jonge Read we often see situations where budding entrepreneurs branch out to start their new business. As is the way of the world every new venture requires funding with the enthusiastic new director utilising the most readily available and cost-effective capital source in which they have access to – the family home.
We are all well aware that starting a new business is tough and the first two years of trading can be considered treacherous. Unfortunately, many factors can lead to new or even established business failure. Often the cause of failure is outside the control of the business operation. Strained cashflow, bad weather, collapse of debtors can all have a domino effect leaving the business in the situation where it can no longer trade, and the individual must consider bankruptcy due to the post directorship debt hangover.
As mentioned earlier, where the family home is involved this can often leave a lifetime of equity in the property exposed in a bankruptcy scenario. This home equity can offer a bankruptcy trustee a quick fix to step in and sell the house and distribute the surplus after fees to creditors, leaving the spouse in a less than ideal situation.
Now comes the light in the form of the Doctrine of Exoneration. The Doctrine can apply in cases where one party has borrowed against the family property for their business or personal use. The debt in either situation is attributable to one party solely, and should be repaid from that party’s share of the equity first. This can often change the distribution of any remaining equity in the property between the parties.
In essence, this means that the Doctrine adjusts the interests of the equity in the jointly owned property when funds are borrowed and secured against the property. The issue is that any amount borrowed against the property must be for the sole benefit of one party. Should that be the case then the loan amount should be repaid from that party’s share first. This may leave the non-bankrupt spouse in a situation where they have the majority of the equity attributable to them personally. This can become a life raft in a stressful situation and allow the spouse to retain the family home.