This month’s case study highlights crucial lessons for individuals whose partners are facing bankruptcy while owning shared assets, such as property. It’s essential to understand the risks and potential long-term implications.
Let’s examine the case of Jill, which paints a picture of how personal circumstances and financial hardships can interconnect.
Jill’s husband, Toby, ran a business that failed due to overwhelming debt. Since Toby operated as a sole trader rather than a company, liquidation wasn’t an option, and he was forced to declare personal bankruptcy. Following advice, Toby reassured Jill that their jointly owned family home, which had no equity at the time due to the mortgage exceeding its value, wouldn’t be affected, as the bankruptcy trustee would disclaim any interest in it.
As is all too often the case, business failure can have a knock-on effect, resulting in marriage failure. The stress of financial hardship led to the breakdown of Jill and Toby’s marriage. To maintain stability for herself and her children, Jill continued paying the mortgage, believing the property was safe. With no contact from the bankruptcy trustee, Jill assumed the home was no longer at risk.
Down the track, Jill entered a new relationship with James, whose tradesman skills added significant value to the home. They built a new deck, remodeled the kitchen and bathroom, and benefited from an improved property market.
However, four years after Toby’s bankruptcy, Jill received an unexpected letter from the trustee, claiming an interest in the property. The trustee determined that the home now had $120,000 in equity, and demanded a portion of it from Toby’s share of the estate.
Shocked by this development, Jill consulted her accountant and reached out to us at de Jonge Read for assistance.
A critical lesson to note here: Even if a property has no equity at the time of bankruptcy, any future increase in equity can still be claimed by the trustee. This legal right does not expire at the end of the bankruptcy term. The trustee retains a claim on any equity growth during and after bankruptcy as long as the property was part of the bankrupt’s estate.
In Jill’s case, despite James’ improvements and Jill’s continued mortgage payments, the trustee sought to claim a portion of the increased value. Fortunately, all was not lost. Our team at de Jonge Read helped Jill and James gather evidence proving that James funded the property improvements and that Jill made all loan repayments. We also obtained professional valuations that demonstrated the value added by these improvements.
Our submission to the trustee successfully argued that the increased equity belonged to Jill and James, not Toby. Thanks to our team’s expertise and persistence, the trustee’s claim was reduced to $11,000—far less than the initial demand. The success of our negotiation highlights the importance of gathering detailed evidence to support claims regarding property ownership and improvements.
This case underscores the importance of seeking professional advice early in the bankruptcy process, especially when shared assets are involved. Addressing potential equity claims upfront can prevent trustees from making claims after property values rise. In Jill’s case, had she sought professional advice when Toby first mentioned bankruptcy, the equity issue could have been resolved earlier, avoiding the trustee’s later claim.
At de Jonge Read, we specialise in identifying potential risks, such as future equity claims, long before they become costly issues. By working with us early on, you can mitigate these risks and protect your assets, and help your clients avoid unexpected financial surprises down the line.
If you have clients facing bankruptcy or at risk, contact our team at de Jonge Read for expert guidance on how to navigate these challenges and safeguard their financial future.
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 | ua.mo1743131487c.arj1743131487d@ofn1743131487i1743131487
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
