Bankruptcy and your home
29th July 2015
In a previous blog, we addressed the question “Should you go bankrupt?”. We looked at some of the common questions/misconceptions about modern personal bankruptcy (specifically in England and Wales) following the introduction of the 2002 Enterprise Act.
As the fate of your home is usually by far the most emotive issue and of the greatest concern for those considering bankruptcy, I felt it warranted a more detailed comment.
“Will I lose my home?” is usually the most common question I am asked by our clients looking for help with bankruptcy. Unfortunately, there is no simple answer to this question other than “not necessarily”.
As previously discussed, all assets (including property) will vest with the Insolvency Service/Trustee in Bankruptcy following the issue of a Bankruptcy Order by the court. When it comes to assets (we will just look at property for now), it’s all about realising the bankrupt’s “beneficial interest”, or in more simple terms, their share of the equity. It is important to note that as secured lending is not included in a bankruptcy, your mortgage usually should be unaffected.
Once the court has adjudged you bankrupt, you are then interviewed by the Insolvency Service usually about 2 weeks later. This can either be a face to face interview (which can last about 3 hours) or a telephone interview (which can last up to 45 minutes), and will depend upon the particulars of the case. During this interview, the Insolvency Service will establish the facts of the case and make a determination to either deal with the case “in house”, or pass to a licensed insolvency practitioner to act as Trustee in Bankruptcy (both have ostensibly the same role).
Under the 2002 Enterprise Act, the Insolvency Service/Trustee in Bankruptcy has 3 years from the date of bankruptcy to deal with the beneficial interest in a residential property. This may not necessarily involve a sale etc, but it could be that the amount of the bankrupt’s beneficial interest is calculated and a charge placed over the property which attracts statutory interest annually. If the Insolvency Service deems the beneficial interest to be marginal, they currently (usually) pass it on to another internal department called the RTLU (Regional Trustee and Liquidator Unit) who will place a restriction over the property (so it cannot be sold without their knowledge or consent) and wait for 2 years 3 months to give the property a chance to increase in value – at the end of this period, the beneficial interest is recalculated.
When it comes to investment properties such as buy-to-let, these are not subject to the 3 year rule and need to be dealt with differently.
How is the beneficial interest “realised”? Clearly, selling the property is one way (although if there are minors in the property, no action can be taken for 12 months). This is usually a last resort, and other options can be explored such as utilising 3rd party funds, re-mortgages etc. Do also bear in mind that the Trustee/RTLU will usually entertain a negotiation in order to avoid lengthy and costly litigation as their primary duty of care is to get the best result possible for your creditors and so cannot justify spending £50,000 in legal fees to obtain £10,000 from you.
How is the beneficial interest calculated? Obviously, the current property value less any mortgages/secured loans/legal charges gives you the equity available. If the property is in the sole name of the bankrupt who is living alone, that would be their beneficial interest. What if the bankrupt is married and the property is in joint names (we are for the sake of this exercise assuming that the spouse is not also going bankrupt here)? This is where things get interesting…
Matrimonial interest – quite simply, the “rule of thumb” is that matrimonial interest is deemed as 50/50.
Equitable accounting – this principle deals with who pays the bills. If matrimonial interest is taken at 50/50, yet the bankrupt has historically paid most of the bills/mortgage etc, then it is deemed their share would be greater than 50%. This is a time-consuming process to wade through historic bank statements to calculate precisely.
Equity of exoneration – this is of particular relevance to business owners. Say for example, a married couple have a house worth £500,000 and a mortgage of £300,000. This would mean the equity is £200,000 and under the matrimonial interest principle, the bankrupt’s beneficial interest would be £100,000. However, you need to consider what the money from the mortgage was used for. Say for example only £100,000 of the mortgage was used to buy the property and £200,000 was used for the bankrupt’s business (which has failed leading to their bankruptcy). In this case, matrimonial interest would be taken as value less purchase costs which would total £400,000 meaning that the bankrupt’s beneficial interest is £200,000 – however, the bankrupt has already used this for their business and as such, their beneficial interest would be £nil with the equity in the property legally all belonging to the non-bankrupt spouse.
Negative Equity – I can’t finish the article about mentioning negative equity. Clearly, if there is no equity, there is no beneficial interest (although this is a generalisation). However, the Insolvency Service may pass the case to the RTLU in the belief that the property may get into positive equity within the 3 year period. Having said that, negotiations with the Trustee/RTLU can still occur during this period and a lump sum agreed to re-purchase the beneficial interest back and therefore setting aside the property from the bankruptcy.
Please be advised that this is a very general overview and should not be taken as formal advice. Every case is different and you would need to carefully analyse the financials etc in order to make a proper determination/recommendation. If in doubt, seek advice.
Should you go bankrupt?
24th July 2015
For an individual dealing with unmanageable debt, there are several options out there which can be used to resolve the situation, such as:
- Looking at the household budget to see where/if savings can be made;
- Speak to your creditors directly and see what they can do to help;
- Debt Management Plans;
- Negotiated Settlements;
- Individual Voluntary Arrangements (IVAs);
- Debt Relief Orders;
In this particular article, we shall look at bankruptcy as it’s a subject I have personal experience from (feel free to read my story).
I cannot stress highly enough that bankruptcy is a very serious matter and it is not to be entered into lightly. Always ensure you get advice before embarking down this road as another solution may be more appropriate (see here for some useful links) – bear in mind that more than one solution could resolve the problem in the short term, but they could have massively different long-term consequences. Educate yourself!
There are two ways of going bankrupt – a creditors’ petition (this is where a creditor makes you bankrupt) or a debtors’ petition (where you make yourself bankrupt). Ostensibly, there is little difference other than you have to attend court personally when making a debtors’ petition and pay a court fee (you do not have to if it is a creditors’ petition). Bear in mind that a creditor may not necessarily make you bankrupt, but instead choose an alternative method of recovery such as a County Court Judgement (CCJ) and enforced by a Warrant of Execution (getting the bailiffs in), or a Charging Order (effectively securing the debt over your home like a mortgage,) or an Attachment of Earnings Order (going to your employer and deducting monthly payments at source). In some cases, it is prudent to take matters into your own hands and go for a debtors’ petition (but this varies case by case as everyone as their own unique set of circumstances which must be taken into consideration).
When making a debtors’ petition, you can of course do this yourself (you can see the Insolvency Service guidance for bankruptcy here), although some people do prefer to engage the services of a firm to assist. The primary advantage of doing it yourself is that you don’t have to pay anyone else. However, some people do find the paperwork overwhelming and take comfort in the fact it will be professionally produced (when presenting a debtors’ petition to the court, you are required to swear a Statement of Truth and are subsequently held under the Perjury Act, so it is extremely important that the paperwork is as accurate as possible), and also welcome the physical presence/support at the court and subsequent meetings with the Insolvency Service/Trustee in Bankruptcy (if applicable).
There are some common questions/misconceptions surrounding bankruptcy which was changed following the implementation of the 2002 Enterprise Act:
1. “How long does it last?”
Assuming that you fully cooperate with the Insolvency Service and Trustee in Bankruptcy (if applicable), you are automatically discharged from bankruptcy after 12 months. Once you are adjudged bankrupt, the Insolvency Service will examine your conduct running up to the bankruptcy and if it is found that you’ve acted inappropriately for example, you could be subjected to a Bankruptcy Restriction Order which will hold you under the restrictions of bankruptcy for a period of up to 15 years.
2. “I’ll never get credit again”
Bankruptcy is a very serious matter and will have a grave impact on your credit file. During the period of your bankruptcy, you are not allowed to obtain credit from anyone for more than £500 without disclosing the fact that you are an “undischarged bankrupt”. Having said that, bankruptcy does stay on your credit file for a period of 6 years (like everything else), so in time, your credit score will repair itself providing you manage your personal finances well following your discharge from bankruptcy.
3. “I’ll lose my house”
Not necessarily. The Insolvency Service/Trustee in Bankruptcy is required to realise your “beneficial interest” in property for the benefit of your creditors. Given that this s usually the most emotive aspect in any bankruptcy, I shall address this particular point in detail in another blog.
4. “I’ll lose my job”
There are certain professions which are affected by personal bankruptcy such as solicitors (or any roles requiring the handling of client money), publicans (you cannot hold a liquor license as an undischarged bankrupt), and bizarrely, church wardens. For most jobs, there is nothing in employment law that should affect your rights should you go bankrupt – having said that, employment contracts do vary and I always advise clients to discuss their situation with their HR department (or a good employment lawyer) ahead of time just to be on the safe side. I have actually had a client who needed to go bankrupt and their employer engaged our services as they felt that without the stress and pressure of unmanageable debt, they would have a far happier and more productive member of staff.
5. “What about my possessions?”
You are required to list all your assets in your “Statement of Affairs” which is presented to the court when going bankrupt. Once adjudged bankrupt, all your assets with vest with the Insolvency Service/Trustee in Bankruptcy who will then make a decision about which assets can be realised for the benefit of your creditors. I have never personally heard of any occasion where anyone attended the home of a bankrupt to perform an audit of possessions – usually, the only assets that generate interest are high value items such as property, cars (see point 6), art and jewellery (anything that has value and is relatively easy to realise). Generally speaking, most domestic items will be deemed as exempt (as an example, you could have spent £1,000 in a TV 2 years ago – by the time someone is paid to collect it, someone else to store it, someone else to test and certify it, and finally someone else to sell it at auction, you may be left with £50 which isn’t worth the time invested). Again, this will vary case by case so do seek advice if this is a concern.
6. “What about my car?”
This is more of a grey area. The Insolvency Service/Trustee in Bankruptcy cannot do anything that will stop you from being able to work. If you need a car to get to and from work, you are usually allowed to keep one. Clearly, your top of the line Aston Martin would have to go, but the accepted rule of thumb is that cars worth up to £2,500 are usually ok (this however is not a rule set in stone and every case would be different). Having said that, I have spoken to an Official Receiver who has said they have taken and scrapped cars worth £400 (the bankrupt worked within walking distance of home), and have allowed someone else to keep a car worth £10,000 (in this particular case, the bankrupt was a GP and lives literally depended on him having a reliable car).
This article gives a general idea/guidance about the mechanics and ramifications of personal bankruptcy. If you are an individual struggling with unmanageable debt, there are no “silver bullets”. Bankruptcy, whilst a serious matter, can be by far the best solution in certain circumstances and you shouldn’t shy away from considering it due to any perceived stigma etc. The right solution will depend on your own unique circumstances and quite often, it’s the smallest detail that can make all the difference. Ignore the “guy in the pub” and get some proper advice on all options!
Interest Rate Rises And The Quest For The “New Normal”
21st July 2015
I find it interesting that things seem to be going almost full circle in the banking sector, almost back to how it was when I first started in 1990. With the re-appearance of TSB (“the bank that likes to say yes”), we could also see the resurgence of another an old brand on the high street with the return of “the listening bank” as HSBC looks to a possible exit from the UK. Interestingly enough, we do appear to have seen a noticeable increase in clients with HSBC personal guarantees which would seem to suggest they may potentially be clearing their balance sheet in preparation for an exit (but I must stress the evidence is purely anecdotal at this stage).
Interest rates will eventually go up – it’s inevitable, and the impact on the banking sector and those individuals and companies who are living on a financial knife-edge could be quite profound. With Mark Carney ditching his “forward guidance” almost as quickly as it was introduced, it seems that you would need to be almost psychic to accurately guess when interest rates will go up. With the Greece issue seemingly resolved for now at least (although not if you believe the IMF) and steady growth in GDP, most people are expecting a rate rise in either Q4 2015 or Q1 2016 (however, we’ve been down this road before and there is still of course the China question which could render the whole topic moot).
Looking at the 2014 results for Barclays and Lloyds Banking Group, it would appear that “risky” loans to individuals and companies (“risky” defined as wither at serious risk of default or already in default) amount to a staggering £5.7bn. As at 31st December 2014, Lloyds non-performing secured loans total £3.9bn and mortgages that are greater than 3 months in arrears (excluding repossessions) are at £6.3bn. Barclays have even had to provision something like £1.25bn due to litigation and investigations relation to the FX scandal. Whilst I believe that generally speaking, the banks’ own balance sheets are in far better shape than they were a few years ago, the impact of a 25 basis point rise in base rates could have a profound impact on their struggling personal customers. With many households already using payday loans and/or credit cards to meet their monthly obligations, any increase in mortgage payments could be the proverbial straw that broke the camel’s back.
I don’t believe we’ll see anything like the carnage we did in the mid 90’s as I can’t see interest rates getting back to 16% anytime soon, if ever again. I believe bigger companies have used this unprecedented period of low interest rates to pay down their debts and re-capitalise their balance sheets. Where does this leave the debt advisory and insolvency market? My feeling is that when interest rates do start moving, it will be private individuals, micro-businesses and SME’s that will be hit hardest.
Our advice is that if you are worried about how a rise in interest rates will affect you, the time to start getting some advice is now. Historically, interest rates have usually hovered about the 5% mark, but the general consensus seems to be that the “new normal” will be in the 2.5 to 3% range.
I am reminded of the ancient Chinese curse: “May you live in interesting times”. Yes, they are interesting indeed!