Everyone goes through ups and downs, and one’s financial situation may not always be smooth sailing. Whether it is a business failure, an investment loss, or an unexpected debt problem, any of these could place a property owner in financial difficulty and even lead them to apply for bankruptcy. For those who own property, the most pressing concern is naturally: once they are bankrupt, what exactly happens to the property in their name?
Under the Bankruptcy Ordinance, once the court makes a bankruptcy order, the bankrupt person’s property, including their interest in any property held in their name, will be taken over and handled by the trustee in bankruptcy. Whether the property is owner-occupied or rented out, it will not be exempted simply because of how it is being used.
A property may be held solely by one individual or jointly by several people. If the property is solely owned by the bankrupt person, the handling is relatively straightforward, and the relevant property interest will vest in the trustee. Depending on the circumstances, the trustee will try to sell or realise the property, and the proceeds will be used to pay the relevant costs and repay creditors. Only if there is any remaining balance after all related debts and expenses have been dealt with will it then be handled in accordance with the relevant procedures.
What if the property is still subject to a mortgage? Bankruptcy does not mean that the existing mortgage will automatically be cancelled, and the bank’s rights as a secured creditor will remain. When the trustee handles or sells the property, the actual amount available for distribution will also depend on factors such as the market value of the property, the outstanding mortgage loan owed to the bank, and the costs involved in the sale.
If the proceeds from the sale of the property are insufficient to repay the mortgage, the unpaid balance will generally become a debt in the bankruptcy case and will then be handled under the bankruptcy process. In other words, even if the person remains insolvent after the property is sold, the relevant debt will still be included in the bankruptcy process. Once the bankrupt person is subsequently formally discharged from bankruptcy, they generally will not need to use their personal assets to repay debts that were included in the bankruptcy process but remained unpaid.
If the property is jointly owned with another person, the bankrupt person’s share of the property interest will likewise vest in the trustee. The other joint owner or owners may discuss with the trustee the possibility of purchasing the bankrupt person’s share at the prevailing market value in order to retain the property.
If the other joint owner or owners are unwilling or unable to purchase the relevant share, the trustee will continue trying to sell or realise that share and use the proceeds to repay creditors. However, it is usually more difficult to find a buyer for “only half the ownership of a property”, so the time required and the way in which it is handled will depend on the circumstances of the individual property and case.
It is worth noting that people often say a bankrupt person can “start afresh after four years”, but even if the bankrupt person is subsequently discharged from bankruptcy, this does not mean that any property interest in their name that has not yet been dealt with will automatically be returned to them. If the relevant property has still not been sold at the time of discharge, the ownership share they originally held will continue to be held and handled by the trustee in bankruptcy until it is successfully sold and realised.
So, can transferring a property to family members before bankruptcy prevent it from being taken over? Of course not. The trustee will investigate any transfer of assets made by the bankrupt person before the presentation of the bankruptcy petition, including whether the property was gifted to family members without consideration or transferred at a price clearly below market value.
If the relevant transaction is regarded as a transaction at an undervalue, an unfair preference, or even involves the fraudulent transfer of assets, the trustee has the right to pursue the matter through legal channels or apply to have the transaction set aside. Therefore, even if the property was transferred into a family member’s name before bankruptcy, this does not mean that it will necessarily be able to avoid the bankruptcy process.
