The Law Handbook 2024

Chapter 5.3: Understanding bankruptcy 369 Mortgaged property Can a mortgagee sell a security property if the bankrupt does not default on loan payments? No. Amortgagee retains its right to sell the mortgaged property or goods if the bankrupt defaults under the mortgage during the period of the bankruptcy. However, there must be a default: the Bankruptcy Act prevents a mortgagee from selling property simply because a debtor becomes bankrupt (s 302). If there is a mortgagee sale, the proceeds will go first to pay the debt owing to the mortgagee. If any money is left over, it will be claimed by the trustee to pay the creditors in the bankruptcy. Can a trustee sell a security property even if the bankrupt does not default on loan payments? Yes. Whether or not the bankrupt defaults on loan payments, the trustee can sell mortgaged goods or land if the bankrupt has sufficient equity in them. Equity equals the market value of property minus amounts owed to mortgagees. If the equity is so low that the trustee is not interested in repossession, a bankrupt can keep the mortgaged goods so long as payments to the creditor are maintained. Keeping a mortgaged car during the bankruptcy A bankrupt can keep a mortgaged car provided: 1 they do not default on payments; and 2 the equity in the car is so low that it is not commercially practicable for the trustee to seize and sell the car. The bankrupt needs to be aware that the equity in the car will likely increase as payments are made (even though most cars depreciate in value). If the equity becomes more than the protected amount for the car (i.e. $9100, as at October 2023) before the bankruptcy ends, the trustee might become interested in selling the car. However, the increase in equity might not be significant if the car also depreciates significantly over the bankruptcy period. For example, if a car is worth $11000 and the bankrupt owes $2500 to the creditor, the bankrupt’s equity is $8500. The trustee could seize the car, but is unlikely to be interested if the amount of seizable equity is only $400. By the time three years of bankruptcy is completed, even if the bankrupt pays out the mortgage, the effect of depreciation will probably keep the bankrupt’s equity in the car at less than $9100. If this is the case the trustee will not be able to claim the car. Jewellery and antiques The trustee is only likely to claim jewellery, antiques and collections of significant value. The trustee does not claim the average wedding or engagement ring. Trophies and awards A bankrupt can keep trophies and awards that are described in the Bankruptcy Regulations. At present, the Bankruptcy Regulations protect sporting, cultural, military or academic awards made to the bankrupt in recognition of their performance (s 116(2)(ba)(ii) Bankruptcy Act; reg 28 Bankruptcy Regulations). Bank accounts Closing bank accounts The trustee is entitled to claim money held by the bankrupt in accounts with banks, building societies, etc. In general, the trustee will not close the bankrupt’s bank accounts or stipulate how many accounts the bankrupt can keep open. If a bank is a creditor in the bankruptcy, AFSA sometimes recommends that a bankrupt close any old accounts with that bank in order to prevent the bank from attempting to freeze accounts or set off debts. How much can a bankrupt keep in a bank account? While all the money in the accounts of a bankrupt vests in the trustee upon bankruptcy, under section 134(1)(ma) of the Bankruptcy Act the trustee ‘may make such allowance out of the estate as he or she thinks just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt’. Accordingly, the trustee may allow the bankrupt to keep some monies in a bank account that are necessary for normal living expenses. If there is money set aside for a specific expense, such as rent, school expenses or a fuel bill, the bankrupt should either make this clear to the trustee, or withdraw the money and pay the bill before entering into bankruptcy.