Family home and bankruptcy – The basics

If my spouse owns our family home, is it protected if I become bankrupt?

Maybe.

A common asset protection strategy adopted by professionals who are ‘at risk’ (e.g. partners in a law firm or company directors) is for the family home (and other assets) to be acquired in the name of their spouse.  However, there is a risk that such assets (or part of their value) will be clawed back and transferred to a trustee in bankruptcy.

A trustee in bankruptcy can make an application for an order in circumstances where:

• a person acquired property (or the value of their interest increased) as a direct or indirect result of financial contributions made by the bankrupt;
• the person still owns the property;
• the bankrupt used or derived a benefit from the property; and
• the property was acquired in the relevant period specified in the Bankruptcy Act.

This would apply, for example, where a bankrupt makes a contribution towards the purchase of a property in the name of his/her spouse or makes contributions towards mortgage payments or the cost of renovating on a property owned by his/her spouse that property increases in value.

In determining whether to make an order, the Court must consider the nature and extent of any person’s interest in the property, any hardship that the order might cause to such a person, their net worth and any hardship an order might cause the property owner’s creditors.

In addition, where a husband and wife purchase a property and the property is registered in the name of one of them (e.g. the homemaker) there is now a presumption, in the absence of evidence to the contrary, that the owner of the property holds it for the husband and wife in equal shares.

The only evidence relevant and admissible in determining the intention of the husband and wife is evidence that exists before, at the time of, or immediately after, their acquisition of the property.  This means that the husband and wife should enter into a Deed of Intention (or something similar) before acquiring the property to clearly state their intention, specify the contributions of the husband and wife (particularly if the spouse in whose name the property is to be acquired contributed a substantial proportion of the consideration) and any other evidence that may assist in rebutting the presumption of equal ownership.

Seek Advice

For many people, the family home is their most important (and expensive) asset.  Advice from an experienced lawyer or accountant with the relevant expertise should be sought in order to minimise the risk that the family home will be exposed to creditors’ claims.