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Saving the family home through the Doctrine of Exoneration



Almost always, the first question when a spouse is considering bankruptcy is, "Is there any way we can save our home?". Many times, there is, and one of the tools to help in this regard is the doctrine of exoneration (a.k.a. equity of exoneration).


SO, WHAT IS THE DOCTRINE OF EXONERATION?

In simple terms, where property is jointly owned and one party has borrowed funds against it which are used solely for that party, then under the equitable doctrine of exoneration, the party who has taken out the loan should be responsible for it. Therefore, any loan repayment should first be taken from their share of the property.


This can tip the balance in favour of the other joint owner by increasing their equitable share in the property.


A typical example of a situation where the doctrine of exoneration occurs is where spouses mortgage the jointly owned family home as security for one spouse's business ventures. In such cases, the presumption is that the parties intended that, as between themselves, the liability should fall on the borrower's share of the property only.


The doctrine of exoneration can play a crucial role in bankruptcy cases. The party who has entered bankruptcy is appointed a bankruptcy trustee whose duty is to realise all assets of a bankrupt in order to repay the bankrupt's creditors. If the bankrupt has an interest in a property and the property has sufficient equity, the bankruptcy trustee will take steps to sell the property or realise the equity.


We recently had a case where a couple owned the family property mortgage-free, valued at $1,000,000. Each partner owned half of the property. The husband took out a loan of $500,000. That loan was used solely by the husband to start his business. The wife was not involved in his business either as a director, employee or shareholder and did not directly benefit from the loan.


Without the doctrine applying, the bankruptcy trustee would endeavour to realise the husband's share of this equity upon appointment, which could be claimed as $250,000. However, we identified that if the doctrine of exoneration could be applied successfully, the scale would be tipped significantly in favour of the wife, increasing her equitable interest in the property as outlined below.

 

Husband (Bankrupt)

Wife

Share

$500,000

$500,000

Business Loan

($500,000)

0

Equity

0

$500,000

Although the husband and wife remain entitled to half of the property, we could deduct the full amount from the husband's share because the wife had no interest in the loan and did not directly benefit from it. 


CONCLUSION


Although it may seem relatively easy to identify a case where the doctrine of exoneration may apply, not every case is the same. The particular facts of each case need careful consideration to determine whether, and to what extent, the doctrine applies.


If you have clients facing a similar situation, please call de Jonge Read for a cost and obligation-free consultation.

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