This article spotlights the rarely used but very important equitable doctrine of Exoneration. If you or your spouse have been declared Bankrupt and a Trustee has been appointed to look after your affairs, you may be eligible to the protection offered under this doctrine. A major and justifiable worry for many people when a spouse is declared Bankrupt is what will happen to their family home. In this article, we will discuss how the equitable doctrine of exoneration may be applied and could potentially help save your family home in the event your partner goes Bankrupt.
The Doctrine of Exoneration is a presumption that affords protection to a spouse where their partner had taken a loan against a property jointly owned, for their sole benefit. The doctrine dictates that the spouse who has taken out the loan for their sole benefit should also be solely responsible for that loan and any repayment should be taken first from their share of the property, giving the spouse who had no benefit from the loan a larger portion of the split.
The Doctrine of Exoneration – The Basics
A) A husband and wife are the owners of real property (usually in matrimonial home) as joint tenants;
B) There is a mortgage over the property and some equity available after accounting for the mortgage;
C) Either the husband or wife has encountered some sort of financial difficulty and has either voluntarily filed for bankruptcy or their estate has been sequestrated by the courts (after a successful petition by a creditor).
D) If the bankrupt borrowed against the equity in the property for their own benefit and the non-bankrupt spouse did not receive any benefit, the amount that has been withdrawn by the bankrupt is “credited” to the non-bankrupt spouse.
E) This reduces the equity which would otherwise be available to the Trustee in bankruptcy and increases the equity availble to the non-bankrupt spouse.
The Doctrine of Exoneration – Practical Example
A couple have a family home in which they are joint tenants that has a value of $2,000,000. The mortgage on the day which one spouse is declared bankrupt is $1,000,000. At face value, there is $100,000 equity in the house to be split equally between the parties. However, on closer inspection of the mortgage, $500,000 relates to the first mortgage for the property purchase and the other $500,000 relates to the second mortgage for the benefit of only one party.
The doctrine of exoneration can be applied as follows:
1) Both spouses are entitled to a 50% share of the property, $1,000,000 each.
2) Both spouses shares are reduced to $750,000 each due to the first mortgage of $500,000
3) The second mortgage of $500,000 only benefited one spouse (the bankrupt), therefore the spouse that took no benefit from the second mortgage will be awarded a greater share of the equity and that second mortgage is deducted from the bankrupt spouse’s share as they solely took benefit from the second mortgage.
Therefore, the bankrupt spouse’s share is reduced to $250,000 and the non-bankrupt spouse’s share remains at $750,000.
If you or your partner are thinking of declaring bankruptcy or have already been declared bankrupt, the legal professionals at Roser Lawyers are happy to assist in explaining the Doctrine of Exoneration in more detail and assisting in whether this is an avenue that might apply to your particular case. Contact us on (02) 9232 3792 or at info@roserlawyers.com.