Could “Your” House be at Risk if a Friend or Family Member is made Bankrupt?
It is not uncommon today for family members, or even friends, to financially assist each other in purchasing a house or unit (or even other assets).
For example, parents might purchase a house in the names of, or jointly with, their children, contributing some or all of the money for the purchase to help their children get on the “property ladder”.
These arrangements may be all very well and good; that is, until somebody goes bankrupt.
Two legal concepts are relevant in the scenario of a family or friend-assisted property transfer or purchase and bankruptcy – namely resulting trusts and the presumption of advancement. It is important to recognise that whilst both concepts, where the facts support them, will arise automatically, both are presumptions only, and as such can be rebutted.
Resulting Trust – Non-Family Situation
A resulting trust is presumed to arise where in the case of non-family members:
- A person who already owns property (let’s call him Adam) voluntarily transfers that property (it could be a house, unit or any type of property) into the name of another person (let’s call her Bethany), or into the names of Adam and Bethany jointly, and Bethany provides no consideration for that transfer by Adam (that is, Bethany doesn’t pay Adam the market price or value of the property); or
- Adam purchases a new property in the name of Bethany only, or in their joint names, using Adam’s money only.
In the above situations, the law will presume that Adam did not intend to absolutely gift the property to Bethany for free, and while Bethany may have legal title to all or some of the property (for example, she might be recorded as the sole registered owner on the house title), she will hold the property on resulting trust for Adam, who will retain the beneficial, or equitable, ownership of property. This gives Adam certain rights in respect to the property which he can enforce.
Presumption of Advancement – Family Situation
Assume the same scenarios above for Adam and Bethany, however this time Adam and Bethany have a relationship in which Adam has “a natural obligation to provide” for Bethany, such as that between parent and child. This time, a different presumption arises in respect to the same property transfer/purchase: the presumption of advancement.
Relationships which give rise to this presumption of advancement include, for example, transfers/purchases from parent to child, husband to wife, and fiancé to fiancée. In each of those relationship situations, the law automatically presumes that Adam did intend to gift Bethany with both the legal and beneficial ownership of the property, and will, therefore, displace the usual presumption of a resulting trust.
So what happens when someone goes bankrupt?
What about Bankruptcy?
If Bethany (as Adam’s daughter) goes bankrupt, then the presumption of advancement will apply unless Adam can rebut the presumption.
So, while Adam might have paid all the money for a house which was registered in Bethany’s name, it will be presumed on her bankruptcy that Bethany holds the house outright, and the house will then vest in Bethany’s bankruptcy trustee who can deal with the house (including by selling it) for the benefit of Bethany’s creditors in accordance with the provisions of the Bankruptcy Act. Adam won’t see a cent of the money he paid, unless he can successfully rebut the presumption of advancement and show a resulting trust applies.
How might Adam do this? The best way, of course, would be to ensure that he had documented his true intention prior to, or at the time, of the transfer/purchase to Bethany. What Adam says and does after the fact will not be admissible evidence unless it is against his interest.
So, if Adam had clearly documented his intention that Bethany was not to obtain the beneficial ownership of the house he was paying for or transferring to her, and that it is a resulting trust situation, then the house ownership will not vest in the trustee on Bethany’s bankruptcy and Adam will not lose his interest (or money) in the house. The presumption of advancement can be rebutted.
What if it was Adam who enters bankruptcy? Bethany (who has the house in her name) is not necessarily safe from the long reach of Adam’s trustee in bankruptcy as in certain circumstances the trustee in bankruptcy can force Bethany to re-transfer the house to the trustee for the benefit of Adam’s creditors.
For example, the Bankruptcy Act may operate to deem the transfer/purchase of the house from Adam to Bethany as void against Adam’s trustee in bankruptcy where the transfer/purchase happened any time within the 5 years prior to Adam’s bankruptcy, and Bethany did not provide sufficient consideration for the property (i.e. she did not pay Adam the market price or value of the house).
If Bethany did, and in good faith, pay Adam market value for the house, then the transfer will not be void against the Trustee.
Bethany might also be in trouble if Adam’s main purpose in transferring/purchasing the house was to defeat his creditors by removing the house (or the money used to buy the house for Bethany) from the creditors’ reach. The Bankruptcy Act will make any such transfer to defeat creditors also void against a trustee in bankruptcy.
Of course, there are defences which can be raised by Adam and Bethany to the above situations, but this a complicated area of the law. To avoid these sorts of possible pitfalls it is always recommended that you obtain expert advice and properly document any transactions if you are considering entering into arrangements with family for the purchase or transfer of property.
Prepared by Craig Shepherd
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.