Bankruptcy and the Family Home: What Happens if an Owner Goes Bankrupt?

 Bankruptcy can be an extremely stressful experience, especially if you own a home. Personal bankruptcy may not only affect yourself but may have consequences for your spouse and children if you own a home jointly.

What is bankruptcy?

Bankruptcy is the legal process in which a trustee is appointed to manage your estate. This happens when you voluntarily make an application for bankruptcy, or creditors make an application to make you bankrupt. The bankruptcy trustee is appointed to manage your bankrupt estate by taking control of debts, income and assets. The trustee can then sell certain assets to pay your debts and enforce compulsory payments from your income if it exceeds a certain amount.

As family homes are often one of the largest assets people own, there can be a risk this may be sold off by the trustee to repay a bankrupt’s debts. However, this may depend on the size of their debts, if they have any other assets that may be liquified to generate cash, and whether the family home is jointly owned with a spouse or another person who may be able to purchase their share.

Joint tenants and tenants in common

The way the family home is owned or divided between spouses may influence whether it can be sold. The most common type of tenancy for couples is joint tenancy. In the case of joint tenancy, all joint tenants have equal ownership and interest in the property and a right of survivorship exists. This means if one of the tenants dies, the remainder of the property will be allocated to the surviving tenant.

Another type of tenancy is tenants in common, which means that tenants own defined shares of the property. This means two or more people can co-own a defined percentage of the property. These shares can be equal or unequal and will vary in most cases. A tenant in common has a right to sell their shares in the property or give them away in their will, with no right of survivorship.

What happens when an owner goes bankrupt?

A joint tenancy is automatically severed upon one spouse or owner becoming bankrupt. This changes the tenancy of the property to tenants in common. This means the trustee can sell the bankrupt spouse or partners’ share in the house. In many cases, the trustee may offer to sell the bankrupt’s share to their spouse or another family member. Alternately, the trustee may invite the non-bankrupt spouse to sell the property on agreed terms. If the non-bankrupt spouse does not agree to purchase the bankrupt’s share or to sell the property, the trustee can apply to the court to force a sale of the property. Any remaining money from the sale of the house will be distributed between the bankrupt estate and other owner.

Will you lose the house?

The answer to this question is dependent on individual circumstances. The appointed trustee has complete discretion over this decision and will take into consideration the best interests of creditors, the bankrupt’s equity in the property and other assets available for sale.

If you are uncertain about your current financial duties or would like advice surrounding personal bankruptcy, please do not hesitate to contact our team of experienced solicitors at Butlers Business Lawyers on (02) 4929 7002 or email us at for personalised legal advice.