Always deal with the house before going bankrupt (or else do it shortly after).
Far too often as solicitors we find ourselves wishing the client had come and seen us sooner.
This scenario is prevalent in bankruptcy. When a person first goes bankrupt, but they still own a house (or half a house), there’s usually very little equity. Discussions are sometimes held with the bankruptcy trustee (trustee) about buying the equity or getting the trustee to disclaim any interest in the house (meaning that the trustee won’t deal with it further).
The discussions often don’t resolve the issue, but the bankrupt client thinks the trustee has agreed not to take any action. Many years later (even after the bankruptcy end) the trustee then notices the property has improved substantially in value and seeks to sell it.
The client, already bankrupt, then calls the lawyer and says things to the tune of:
- There was an agreement with the trustee to let them stay in the house;
- They understood that the trustee wouldn’t sell it;
- They have been paying the mortgage which they think should be taken into account; or
- The trustee should only be entitled to the value of the property when they went bankrupt.
After discussing this with the lawyer they find out that:
- There isn’t any recorded agreement with the trustee;
- The trustee has usually reserved their rights to realise the equity in the property later (which they are entitled to);
- The mortgage contributions usually aren’t worth that much as they’re set off against the rent they should have been paying; and
- The trustee is entitled to the increase in value.
This is a complex area of law and there are exceptions to these issues. However, these exceptions are difficult to establish and usually involve a trial if the matter can’t be resolved with the trustee – often a very costly exercise.
The costs of a trial or a resolution with the trustee at this stage are always far higher than what it would have cost to ensure that it was dealt with either before bankruptcy or shortly after going bankrupt.
Our team have been involved in cases where the costs of resolving the equity in the house at the start of bankruptcy were almost nothing but became a claim for $200,000 many years later for the increase in value. This matter resolved but still cost the client over $100,000 to settle plus the legal costs of the dispute.
Are you suffering financial distress and is bankruptcy an option? If this is the case, it’s incredibly important to reach out and discuss your legal options. Being proactive in these scenarios will not only provide you more certainty, in the long run, but it’ll also save you time and money better spent elsewhere.