The principle of exoneration can apply when a single joint property-owner uses it as security, with consent of the other owner, for a loan made solely to the two parties. The other joint owner in such situations does not enjoy the loan-benefit. The joint owners usually are husband and wife, but it is not necessary for them to be married for the doctrine to be applicable.
Dictates of the Principle
The exoneration doctrine in essence dictates that a loan which is solely to the benefit of one party should be paid out firstly of that party’s share. In such case, the other mortgage-party should be seen only as a surety, with their share only being utilised in case of a possible subsequent shortfall. The practical effect and legal reasoning behind the doctrine are both not very simple.
The doctrine of exoneration presumes the intentions of such two parties along with their roles in the transaction. It includes defining who the principle and surety are, although both of them have under the mortgage the same legal obligation and both their share of entire property gets mortgaged. The principle of exoneration absolves the co-owner of any blame for the loan. Given they did not get the benefit out of it, they need not be held as being primarily responsible for repaying it. That primary role rests entirely with the party to whose gain the loan was made.
The over-riding aspect is that the loan has to be utilised for a distinct purpose that is separate from and does not involve the other co-owner. If both husband and wife for instance both stood to gain from such a loan, the husband shouldn’t be the only one bearing the initial responsibility of making its repayment. A bankruptcy trustee obviously of one of these parties would want to know if both parties gained from the loan along with what extent the estate’s interest in their property is liable to the debt. Any part of the secured debt applied for a joint purpose will not enjoy the benefit of the exoneration principle.
Example of the Principle Applied
George and Jane own a house that is worth $400,000. John borrows $250,000 to finance a commercial entity in which Jane bears no financial interest. This loan is borrowed against the property they jointly co-own 50/50. George then declares bankruptcy soon after venturing into his start-up business.
The Bankruptcy Doctrine of Exoneration in such case will not keep the lender from selling George and Jane’s house to take care of his business loan. The remaining house-proceeds will nonetheless not be shared 50/50. Rather, if the house sells for $400,000 for example, the $250,000 is first deducted to recover the business loan and $150,000 remains.
Since Jane originally had $200,000 equity invested in the property as did George, Jane will keep the entire $150,000 while George gets nothing. If the bankruptcy trustee or creditors were expectant of gaining access to a part of John’s house for offsetting other debts, they would be quite disappointed. This is because George will have no equity left within the house for applying to anything else apart from the business loan.
Learn more information here at https://www.debtmediators.com.au/bankruptcy/bankruptcy-doctrine-of-exoneration/.