Protecting the Family Home in Bankruptcy: How Advisors Can Act Before the Trustee Is Appointed

Personal insolvency numbers are rising. AFSA recorded 12,257 new personal insolvencies in 2024-25, a 5.3% increase on the prior year, with forecasts pointing to 13,000 in 2025-26. Sole traders, small business owners, and construction operators account for the greatest concentration of business-related filings. For advisers managing clients in these sectors, the question that almost always follows a bankruptcy discussion is the one the client’s spouse dreads most: what happens to the house? The answer depends on two things: whether equity exists, and whether the Doctrine of Exoneration (DOE) applies.

Under section 58 of the Bankruptcy Act 1966 (Cth), a bankrupt’s property vests in the trustee upon appointment. For jointly-owned real property, the trustee steps into the bankrupt’s position as co-owner. This does not automatically mean the home is sold.

The trustee will only pursue the property where equity exists in the bankrupt’s share. Where the property is held as joint tenants or tenants in common, the trustee will typically offer the non-bankrupt party the first right to purchase the bankrupt’s share at market value. If the mortgage is current and the non-bankrupt party has the means to buy it out, the home is preserved.

The difficulty arises where significant equity exists and the non-bankrupt party cannot raise the funds. In those circumstances, the trustee will ordinarily move to sell.

The DOE is a principle in equity. It applies where one co-owner of a property has borrowed against it for their own purpose, with no benefit flowing to the other co-owner. The principle: the party who received the benefit of the loan should bear its burden first. The other co-owner is treated in equity as a surety only, and their share is not applied until the benefiting party’s share is exhausted.

In a bankruptcy context, this recalibrates how equity is divided before the trustee can realise it. The business loan is notionally attributed to the bankrupt’s share before equity is split. Depending on the figures, this can significantly reduce the bankrupt’s equity, or eliminate it entirely.

Australian courts have consistently upheld these principles, confirming that where any benefit to the non-borrowing co-owner is speculative rather than substantive, the DOE applies in full.

A client was referred to de Jonge Read® by their accountant following the liquidation of the husband’s company. The couple jointly owned their family home, valued at $1 million, registered as tenants in common. Two loans were secured against the property: a joint purchase mortgage of $200,000, and a subsequent loan of $400,000 the husband had drawn for working capital. The wife had no involvement in the business and received no benefit from the second loan.

On a standard 50/50 split, each party held $200,000 in equity. The trustee would have moved to realise the husband’s share. The wife had no means to purchase it.

Applying the DOE, the $400,000 business loan was attributed entirely to the husband’s share. His equity reduced to nil. The wife’s equity was preserved at $400,000. de Jonge Read® worked directly with the trustee to confirm the application and with the bank to maintain the existing loan facilities. The family remained in the home.

The DOE is not automatic. Advisors should understand the conditions under which it is and isn’t available.

It is more likely to apply where:

• The loan secured against the property was drawn for the business or one party’s exclusive purpose
• The non-bankrupt co-owner was not a director, guarantor, or beneficiary of the borrowing
• Documentary evidence clearly links the loan proceeds to the bankrupt’s use

It is less likely to apply, or may not apply, where:

• Both parties signed the loan documents in circumstances suggesting shared benefit
• Proceeds were applied to joint household purposes, such as a renovation
• The non-bankrupt party held a directorship or ownership stake in the business that received the funds

The trustee will require clear and compelling evidence. Documentation of the loan purpose, how funds were applied, and the extent of the non-bankrupt party’s involvement is essential.

The window to make a DOE argument count is before the trustee is formally appointed. Once the process is underway, it becomes harder to gather documentation, harder to put a coherent case to the trustee, and harder to negotiate with the lender from a position of strength. That is where de Jonge Read®’s pre-insolvency work is most valuable.

When a business owner client is approaching bankruptcy and jointly owns property with a partner who had no involvement in the business, our team reviews the loan structure, identifies whether the DOE applies, prepares the supporting documentation, and works alongside the trustee to confirm the outcome. We also liaise with lenders directly, as in the case above, to ensure loan facilities are maintained where appropriate.