Bankruptcy and the family home: straight answers, real options

When the family home is on the line, the anxiety is real. Every week people are lying awake doing the maths in their heads, wondering what happens next. The role of an adviser is to replace fear with a plan, starting before bankruptcy is even on the table.

It’s about thinking in terms of Plan A and Plan B. Most people already have Plan A (refinance, negotiate with lenders, lean on family support). When that stalls, there’s a suite of Plan B options — bankruptcy is simply the last one. The earlier the discussion starts, the more choices remain available.

First principles: what actually decides the home’s fate?

Three levers determine outcomes:

1. Ownership structure – The structure can matter, but it is complex and often the position is determined only after considering the documentation as it's commonly a matter of substance over form.. Key considerations include whether the property is held as sole owner, joint tenants, or tenants in common. Joint ownership complicates matters, and the type of joint ownership affects what a trustee can access and how sales occur.
2. Equity position – Trustees look at what equity exists after mortgages and selling costs. If there’s little or no equity, forced sale is less likely; if there’s material equity, you should expect practical discussions about realising it, often starting with a negotiated buy-out by a spouse or family member.
3. Timing & conduct – Actions taken before any formal appointment are important. There are legitimate ways to structure cashflows and responsibilities to avoid inadvertently putting the home at risk. Acting early, sensibly, and with professional advice helps prevent missteps and reduces the likelihood of structures or transactions being unwound.

Joint ownership: why structure (and paperwork) matters

Where couples or families co-own or where money is loaned from a family member or “gifted” to buy a home, two legal ideas sometimes appear in real life:

• Doctrine of exoneration – In plain terms, if one spouse has effectively “cashed out” their equity and the other spouse has refinanced and taken on the future obligations, there can be an argument that the first spouse no longer has beneficial interest to chase. It’s technical and must reflect what actually happened (and how repayments are made), but it can be powerful late in the game.
• Presumption of advancement – Depending on the circumstances, a contribution may be treated as a gift rather than creating any equitable clawback. This presumption only applies in certain family relationship, typically from a man to a woman, or from parents to their children. A common example is when the “bank of mum and dad” provides funds to help an adult child buy a property, and that child later becomes bankrupt. Without clear documentation, the contribution will usually be deemed a gift rather than a loan or trust arrangement. Properly documenting any loan or trust is therefore essential for asset protection.

Whatever the theory, behaviour must match the structure. If ownership of a share has been transferred, mortgage payments should not continue from the original owner’s account. Ensure that service aligns with the person who actually owns the asset and earns the income.

Bottom line: paperwork, payment flows, and timing. Get these aligned early to avoid common traps.

Realistic pathways (short of bankruptcy)

Informal options (Plan A): refinance, hardship variations, staged settlements with creditors and budgeting help from a qualified financial counsellor. If stress levels are high, this is the place to start, financial counsellors are experts, not “call-centre script readers,” and they’ll help get things organised fast. For a practical first step, see ASIC’s MoneySmart guide and the National Debt Helpline.

Formal options (Plan B, but not bankruptcy):

• Part IX debt agreement - strict thresholds apply; often unsuitable if you own a home with equity. AFSA’s overview is a good litmus test for eligibility.
• Part X personal insolvency agreement - a negotiated settlement via a controlling trustee.

If bankruptcy is necessary: it’s a reset, not a sub penalty for failure and more often than not, the cheapest option. The trustee will assess equity and practicalities; many matters get resolved via family buy-out of the bankrupt’s interest rather than a sale of the property altogether. Early, open engagement always improves that conversation.

“What should I do right now if I’m worried?”

1. Talk early - A confidential, no-obligation chat helps map out options against income, assets, liabilities, and—crucially—the household’s needs. Each initial discussion helps refine and strengthen Plan A, often uncovering practical steps that may not have been considered, such as contacting a debt helpline or seeking targeted legal advice (referrals can be provided). This initial guidance and support are offered free of charge. In many cases, people are assisted to understand their options, refine Plan A, exhaust Plan A, and only if needed, move to Plan B. In practice, around ten people are assisted or advised for every one formal appointment made.
2. Match cashflows to ownership - If a spouse is the property owner, structure finances so that the spouse’s income services the mortgage, while the other income covers living costs rather than asset purchases. This ensures the financial story (and the bank statements) remain aligned.
3. Don’t DIY restructures - Transfers can trigger stamp duty, clawback risk, and unintended tax consequences. Always seek professional advice before making any moves.
4. Use reputable help - If a trustee or turnaround specialist is needed, choose someone regulated and recognised. ARITA’s member directory provides a reliable starting point.

A quick note on myths

•  “If I file for bankruptcy, I automatically lose the house.” - Not always. Outcomes depend on equity, contributions and what third parties can viably propose. Structured buy-outs are common.
• “Moving things around late will solve it.” - Last-minute shuffles often backfire. Conduct and documentation must align and withstand scrutiny. It’s important to speak up early. 

Why we do this

The numbers matter, but so do people. Bankrupts or debtors often go from exhausted and fearful to genuinely relieved once there’s a plan — sometimes via a buy-out, sometimes through an orderly winding-up, and sometimes with a complete life reset. The focus is always on clarity, dignity, and a fair outcome for everyone affected.
“People appreciate our honesty and straight talking… we’re only ever a phone call away.” That’s not a slogan; it’s how the team at RSM works.

If there are concerns about the family home, it’s important not to wait. A 30-minute conversation can change the trajectory. Based in Canberra and Melbourne, the team is available to speak with individuals or their advisers to map out available options.

Helpful resources 

• Start a confidential, free conversation with our RSM Restructuring and Recovery team on 1300 263 816
• Further RSM information here
• What help exists if I’m in debt? (AFSA overview)
• Debt agreements (Part IX) explained (AFSA)
• Joint tenants vs tenants in common (ATO)
• Spousal transfers & duty rules (State Revenue Office Victoria)
• Find a regulated turnaround/bankruptcy professional (ARITA directory)
• Free, confidential financial counselling (MoneySmart & National Debt Helpline)