Property at Risk in Bankruptcy
Property Divisible in a Bankrupt Estate
Not all property of the bankruptcy is available for realisation by the bankrupt estate.
This Blog will provide a brief overview of the distinctions to be made in the Bankruptcy Act.
‘Property’ is defined widely in s5(1) to include:
‘real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property’
With some minor exceptions, the property of the bankrupt is defined in s5(1) as:
the property divisible among the bankrupt’s creditors; and
any rights and powers in relation to that property that would have been exercisable if bankruptcy had not occurred.
The property divisible among the bankrupt’s creditors is considered in s116(1) of the Bankruptcy Act. It includes property belonging or vesting in the bankrupt at the commencement of the bankruptcy, or acquired after commencement but before discharge; and the capacity to exercise powers in relation to the property.
Included are choses in action, i.e. the right to debts owing to the bankrupt, and to damages (though not for personal injuries) where the amount is more than nominal. These actions should be pursued by the trustee. Also included are rights under contracts, which again should be pursued by the trustee.
Property that is acquired after bankruptcy, but before discharge, is also included in s116(1). Thus, any gifts or bequests made to the bankrupt during the bankruptcy become part of the bankrupt’s estate and available for realisation and distribution to creditors (subject to them not falling within s116(2), which is discussed below).
In principle, income earned after bankruptcy could be regarded as after-acquired property, and thus vest in the trustee and be available for distribution to creditors. However, specific provisions have been introduced in the Act to prescribe the circumstances in which a contribution from income is required (income contributions will be discussed in a future Blog).
Section 116(2) sets out certain property that is not divisible; that is, it is made exempt from collection and realisation, and the bankrupt retains his or her interest in that property. The main categories of exempt property are discussed below.
Property held on trust
Property held on trust is exempt from distribution to creditors because the bankrupt is not the beneficial owner of the property.
Another issue that can arise in family relationships is the equity of exoneration. This doctrine is explained by Deane J in Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700 at 702 as follows:
Where the property of a married woman is mortgaged or charged in order to raise money for the benefit of her husband, it is presumed, in the absence of evidence showing an intention to the contrary, that, as between her husband and herself, in the position of surety and entitled both to be indemnified by the husband and to throw the debt primarily on his estate to the exoneration of her own.
In bankruptcy cases, the application of the doctrine can have the effect that the non-bankrupt co-owner exonerates the debt on the bankrupt’s interest in the property, such that the non-bankrupt co-owner’s interest is maximised, and the equity available to creditors is reduced. The equity is not confined to married women, but can be used to benefit married men (eg Dickson v Reidy  NSWSC 1200), and also by co-owners not in a marital relationship (Parsons v McBain (2001) 109 FCR 120).
The preconditions to the applicability of the doctrine are:
a person must charge his/her property;
the charge must be for the purpose of raising money to pay the debts of another person, or to otherwise benefit that other person; and
the money so borrowed must be used for that purpose: Parsons v McBain (2001) 109 FCR 120.
Household property can be exempted either because it falls within the kind of property prescribed by the regulations, or because it is identified by a resolution passed by the creditors before the property has been realised.
The regulations include both a generic description of household property exempted, determined by reference to current social standards and a list of household items that are specifically exempted. The regulations also provide discretionary factors used in determining whether property is exempted, including a reference to the number and ages of the members of the bankrupt’s household, and the relative costs of selling an asset against its likely return.
Tools of Trade
Property that is used for earning an income by personal exertion is exempt where it does not exceed the value prescribed by the regulations or is identified by a resolution passed by the creditors before the property has been realised. The prescribed amount is indexed, but is approximately $3,500.
Means of Transport
Property used primarily as a means of transport is exempt where the bankrupt’s equity in the vehicle does not exceed the value prescribed by the regulations or is identified by a resolution passed by the creditors before the property has been realised. The prescribed amount is indexed, but is approximately $8,000. If a bankrupt has a vehicle that exceeds this value, the trustee would realise the vehicle and remit the prescribed amount to the bankrupt for the purchase of another vehicle
Insurance and Superannuation Investments
Insurance and superannuation investments are also protected to a great extent in order to assist with provision of benefits in older age. However, superannuation payments made in order to defeat creditors can be recovered by the trustee (ie, hiding cash or assets in a super fund).
Damages for Personal Injury
Any right of the bankrupt to recover damages or compensation for personal injury to themselves, their spouse or a member of their family, or in relation to the death of their spouse or family member is exempt, as is any damages or compensation actually recover.
Property Purchased with Protected Money
Exempt property is exempt from distribution to the creditors where the whole or substantially the whole of the property was protected money. This includes property purchased with compensation for personal injury, superannuation payouts, and money paid under rural support schemes.
If your are considering bankruptcy, or are presently bankrupt and a concerned as to your rights and obligations, please contact Grauf O'Brien Lawyers now for a confidential discussion.