In this month’s case study, we look at the case of Kim who got a really nasty surprise from a trustee in bankruptcy. Kim’s husband, Nathan, had run into financial difficulty. Unfortunately, as is sometimes the case this led to the breakdown of their relationship, and they separated. Both moved on with their lives, and a number of years later Kim and her new partner, Graham, were living happily ever after – or so they thought.
Nathan’s business had failed, and he faced a number of insurmountable debts. After their separation Nathan advised Kim that he was entering into bankruptcy. At that time Kim expressed her concern about the family home, which was in joint names and where Kim was living with their two children. Nathan assured her that there was nothing to worry about. The mortgage on the property exceeded its value, so he told her the trustee would not be interested in it. While there was no equity, Kim and the children loved the home and she wanted to keep paying the mortgage to retain the property. Kim was earning her own income and could keep up with the payments.
While she was worried, over time Kim felt more comfortable as she never heard anything from the trustee. Nathan went bankrupt and nothing changed. A few years later Kim entered into a relationship with Graham, who moved into the family home. Graham was a tradesman, and very handy, and he decided to do improvements to the property. A new deck and entertaining area. A remodeled kitchen. A lovely pergola out the back. Even better, the property market in their area improved and the value of the home increased markedly. Nathan’s term of bankruptcy expired after three years, and everything was looking good.
The letter in the mailbox
Then one day, five years after Nathan went bankrupt, Kim got a letter from his trustee. The trustee asserted an interest in the property and offered her the opportunity to buy the equity that was attributable to Nathan. Kim was stunned, and after talking to her accountant, contacted de Jonge Read.
So, what was going on?
Nathan’s equitable interest in the family home vested with the trustee on their appointment. This does not change just because the term of bankruptcy is over. The trustee knew there was no equity in the property at the time of his appointment, meaning that the mortgage exceeded the value of the home. However, the trustee kept a bit of an eye on the property market and when it improved, he asserted his right to the equity. The claim was made two years after Nathan had been discharged from bankruptcy.
Now there was equity in the property. Kim had been making additional mortgage payments to try to pay the home loan off more quickly and save some interest. The market improved quite a bit. As a result, the trustee made a claim of $95,000. To say Kim was shocked was an understatement. She had no idea the trustee could come back after all that time and make a claim.
What was the outcome?
de Jonge Read entered into extensive negotiations with the trustee. We helped Kim and Graham gather the necessary evidence that Graham had funded the property improvements. Kim was able to provide bank statements that showed that she had made all the loan payments. Written opinions were obtained regarding the increase in property value attributable to the improvements Graham had made.
The argument we made to the trustee was that Graham had an equitable interest in the property. None of the equity that became apparent was due to Nathan, and in fact, this equity belonged to Kim and her new partner Graham. These negotiations were exhaustive, with a lot of back and forth, argument and rebuttal, claim and counter claim. Our team are tenacious though and fought hard for Kim to get her the best result possible.
Some four months later an agreement was reached with the trustee. Kim agreed to pay $8,000 in full and final satisfaction of the trustee’s claim. Kim was relieved, as she thought she would have to sell the family home to satisfy the trustee. This would have been heartbreaking after all the effort she had put into making the payments, and that Graham had put into improving the property.
Key Take Home
If a client owns property and is forced to enter bankruptcy, even if there is no equity in the property at that time, the future equity in the property must be dealt with, preferably prior to the trustee’s appointment. Future equity can be sold to a third party. In many cases, the payment for the future equity is made to the trustee on his appointment and can be used to meet the trustee’s professional fees.
If Kim had sought independent, professional advice when Nathan told her he was going bankrupt, all of the stress and worry of this issue could have been avoided. The equity could have been dealt with legally and commercially and a future claim by a trustee avoided.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Contact us now on p. 1300 765 080 | firstname.lastname@example.org