The Law Handbook 2024

Chapter 5.3: Understanding bankruptcy 371 household property. (For a list of items a bankrupt can keep, see reg 27 Bankruptcy Regulations, and ‘Warrant to seize property’ in Chapter 5.2: Are you in debt?) Insurance policies Payment of claims Insurers cannot refuse to pay a claim just because the insured person goes bankrupt. Section 54 of the Insurance Contracts Act 1984 (Cth) (‘ IC Act ’) requires the insurer to pay a claim if the insured’s conduct did not cause or contribute to the loss. Most insurance claims relate to damage to a house, car or person, and so have no connection with any conduct leading to bankruptcy. Cancellation of a policy Insurers cannot cancel a policy just because a person becomes bankrupt unless the policy has a specific term allowing this to be done. Note that bankruptcy may make it difficult to obtain or renew some types of insurance policies. Refusal to cover Some insurers automatically refuse new applications from bankrupts for insurance coverage. This can be a particular problem for tradespeople who need public liability insurance to work. If an insurer refuses a claim or cancels a policy If an insurer does refuse a bankrupt’s claim, or cancels a policy on the sole ground that the insured is a bankrupt without there being a specific term in the contract, the bankrupt should lodge a complaint with the Australian Financial Complaints Authority (tel: 1800 931 678). Houses and land The trustee’s power to sell A trustee can sell a bankrupt’s house or land whether or not it is secured by a mortgage. The mortgagee’s power to sell A creditor who holds a mortgage over the property can sell the property without the trustee’s consent if mortgage payments fall into arrears. Proceeds of sale In general, after payment of loans that are secured by a mortgage over the house, legal fees and selling expenses, the proceeds of sale are divided between any joint non-bankrupt owners and the trustee. What happens if there is no equity in the property? The trustee will not take action to sell property if the bankrupt has no equity in the property. However, the trustee might still lodge a caveat on the title even where there is no equity. Equity in the property might increase during the time allowed to the trustee to sell the property due either to increases in property values or to payments made by the bankrupt or another person. Selling equity to the non-bankrupt spouse While the trustee generally has an obligation to sell any property, the trustee might choose not to sell property immediately if the bankrupt’s equity (share) is not valuable enough to leave any surplus for the creditors after paying expenses and the trustee’s costs. In such a case, the trustee is often happy to accept an offer from a friend or relative of the bankrupt to purchase the bankrupt’s share. Trustee’s power to sell property after discharge WARNING The trustee retains the power to sell the property even after the bankrupt is discharged. The trustee has this power of sale even if a bankrupt had no equity in the property at the time of bankruptcy, but later builds up significant equity – for example, due to increases in land values. The trustee has the power to make a claim on any equity that the bankrupt might have in the property for a certain period of time after the bankrupt is discharged (ss 127, 129AA(3) Bankruptcy Act). The length of time available to the trustee to make a claim is: 1 for property disclosed in the statement of affairs – six years after discharge; 2 for property acquired before the bankruptcy and not disclosed in the statement of affairs – 20 years