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.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.