Bankruptcy & The Doctrine of Exoneration

The Doctrine of Exoneration can be applied to scenarios, where an asset which is jointly owned by multiple people, has been given up as a security against a loan, which is used for the sole benefit of only one of the joint owners. As per the Doctrine, that owner of the asset who received the sole benefit of the loan, has the first obligation to repay the loan. Only in case he is unable to repay the full loan, can the other joint owners of the asset be called upon to meet the deficit.

This is better understood with the help of an example. So let’s say that there is a married couple who jointly owns a house. They give up the house as security for a loan, which is used solely for the benefit of the husband, probably his business.

Then if the husband goes bankrupt, any equity arising from the house is first equally divided between the husband and the wife. And then the husband’s share of the equity is used to repay the loan first. Only in case the husband’s share is insufficient to repay the full amount of the debt, can the wife’s share of the equity be used to pay the shortfall.

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