Updated: Apr 5
Life is unpredictable, and the quirks of the Bankruptcy Act can lead to some difficult circumstances for any individual. If careful asset protection is not in place, it can result in devastating consequences.
In this case study, we’ll look at how a family home that was initially not exposed landed in the lap of a bankruptcy trustee. We also show how it was eventually salvaged.
In 2022, we assisted our client, Jane, to enter Bankruptcy in an organized and controlled manner. Jane ran a franchised business in the catering industry as a sole trader and experienced severe financial problems during the Covid pandemic.
Jane was facing:
An insurmountable debt under the franchise agreement due to her personal guarantee
Legal action from the franchisor
Other creditors and the Australian Tax Office were pursuing her.
Jane’s spouse was not involved in the business and had a high-paying job in a different industry.
The difficult decision was made to close Jane’s business, then enter bankruptcy, so she was able to put the problems behind her and focus on caring for her family. While subject to some restrictions, life was easier, and Jane was able to move forward.
As soon as Jane engaged de Jonge Read, our Strategist team found that Jane’s family home was purchased and mortgaged solely by her husband. This raised an immediate recommendation for Jane’s husband to create a testamentary trust within his will.
The benefit of a testamentary trust is that any property inherited during the term of bankruptcy becomes property unavailable to a bankruptcy trustee. A testamentary trust is created by a clause in a will and does not require a trust to be established separately. Therefore, the family home would have been passed to the husband’s trust and not to Jane personally.
Sadly, Jane’s husband at the time decided it was not worth the legal cost to have that extra protection for the family home and did not follow de Jonge Read’s recommendation. At the time he thought he was young and healthy, so there was no need to worry because he was young and healthy. Tragically, some four months later he suffered a heart attack and passed away.
With the unexpected change, $400,000 in equity of the house that Jane's inheritance now vested with her bankruptcy trustee. The trustee was at liberty to sell the property and realize the equity for the benefit of creditors.
In addition to the equity in the family home, Jane was also the beneficiary of a life policy of $300,000. Since it was from a death benefit, this money is not available to her bankruptcy trustee.
While Jane was able to retain the benefit from a life policy, she was faced with the possibility of losing her family home, with would be devastating for her and her two children.
Jane once again reached out to de Jonge Read for advice and support during this tough time.
We considered all the facts and understood what was important to Jane. She really wanted to retain the family home so her children would have at least some stability in their lives. Based on her situation and goals, we recommended Jane consider offering creditors a compromise under Section 73 of the Bankruptcy Act. A S73 compromise is an offer to creditors, via the bankruptcy trustee, as full and final satisfaction of all outstanding debts.
de Jonge Read understands the cruciality of communication among all parties; the trustee, the creditors, and our client. We assisted in communicating with all creditors to explain the commerciality and extenuating circumstances pertaining to her offer. We mapped out how the communication would happen and, in the meantime, worked with Jane on the best offer to ensure the success of the project. de Jonge Read was pleased with the outcome we help Jane achieve:
$180,000 offer to the creditors (including the trustee fee) was accepted by the creditors as a majority;
Upon the offer being accepted by special resolution of creditors, Jane’s bankruptcy was annulled; and
Jane secured her family home and $120,000 in cash to further support her children in the future.
There was still a mortgage on the house and other payments needed to be maintained, but Jane was delighted with the outcome. It brought some much-needed relief to her family, and it was a far better result than she expected.
------------------------------------------------------------------------------------------------------------------------------- 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 | email@example.com