Bankrupt's Home : What Happens?
By The Insolvency Service
What is meant by the bankrupt’s home?
It is the interest in a dwelling house, which at the date of the bankruptcy order was the sole or main residence of:
• the bankrupt; or
• the bankrupt’s spouse or civil partner; or
• the former spouse or civil partner of the bankrupt.
Will I lose my home?
The official receiver as trustee (or an insolvency practitioner appointed as trustee in place of the official receiver) may have to sell your home to help pay your bankruptcy debts. This applies whether the home is freehold or leasehold and whether it is solely or jointly owned.
If your home is mortgaged, the lender may be able to sell your home if you don’t carry on with your mortgage payments. You should consider contacting your lender about your bankruptcy and your mortgage payments.
When will the official receiver or trustee sell my home?
If your husband, wife or children are living with you, it may be possible for the sale to be put off until the end of the first year after your bankruptcy. This gives you time to make other housing arrangements.
After that time, the court will only refuse an order for sale in exceptional circumstances or if the value of the trustee’s interest in the property is worth less than £1,000.
What are the trustee’s options for dealing with my home?
Within 3 years the trustee must:
• realise the interest (sell it to somebody); or
• apply for an order of possession or sale; or
• apply for a charging order in respect of the value of the interest; or
• enter into an agreement with you regarding the interest.
A minimum level of £1,000 has been set, below which any application for a charging order or order for possession or sale will be dismissed.
When do the 3 years run from?
The 3 years run from
• the date of the bankruptcy order; or
• if you have not informed the trustee of the property within 3 months of the bankruptcy order, the 3 years run from the date the trustee becomes aware of it.
The 3-year period can be extended by a court order.
What happens at the end of the 3-year period?
If, at the end of 3 years, the trustee has taken no action, the interest in the property re-vests in (i.e. returns to) you.
The Insolvency Act 1986 allows a bankrupt’s interest to re-vest earlier than 3 years but Insolvency Service policy is that generally this will happen no earlier than 2 years 3 months after the bankruptcy order was made. Where there is little or negative equity and it is likely that this will be the case at 3 years, the interest will usually be allowed to revert to the bankrupt following review at the 2 years and 3 months point.
Does the 3-year provision always apply?
The 3-year provision does not apply to the sole or main residence of a co-habitee or ex co-habitee in which a bankrupt has an interest. In addition, it does not apply to any property that is not the sole or main residence of a bankrupt, their spouse or civil partner or their former spouse or civil partner. With such properties the trustee’s interest remains indefinitely, until the property has been dealt with.
Can anything be done to stop the official receiver or trustee selling my home?
Your husband, wife, partner, a relative or friend may be able to buy the beneficial interest in the home. This will stop the official receiver or trustee selling your home later.
What is meant by my 'beneficial interest' in my home?
This is your interest in the proceeds of sale of the property. It is different from the legal title to the property, which is held by the owner. If you are the sole owner, the beneficial interest is the whole value of the property. If there are joint owners, the beneficial interest is usually an equal share of the value. If there are any amounts owed on mortgages or other loans secured on the home, these will be repaid first from any proceeds of the sale. Your beneficial interest is calculated after deducting these amounts from the value of the property.
What is the low cost transfer scheme?
If the official receiver is handling your bankruptcy and the beneficial interest is more than £1000, your husband, wife, partner, relative or friend may be able to take part in a property conveyancing scheme run by The Insolvency Service and a firm of solicitors. Under this scheme, the beneficial interest can be transferred back to you, your husband, wife, partner, relative or friend. (Note: the low cost conveyancing scheme is only applicable to jointly owned properties.)
They will have to pay:
• for a solicitor or licensed conveyancer to act for them;
• £211 to cover the official receiver's legal costs. This amount must be paid in advance. It includes an allowance for expenses that may be incurred in the transaction. If the allowance is not fully used, they will receive a refund;
• the cost of an independent valuation unless you already have a very recent independent valuation of the property;
• the agreed purchase price for the beneficial interest based on the valuation.
They will also have to give up to date details, in writing, of the amounts needed to pay off the mortgage and any other charges on the property.
If the property is solely owned the transaction is more complicated. This is because the legal title, as well as the beneficial interest, must be transferred. If you wish this to happen please contact the official receiver or trustee for details. In this type of transaction, there is no fixed-price property conveyancing scheme. The current cost of the official receiver’s legal fees, which the purchaser would need to pay, is approximately £500.
If an insolvency practitioner is handling your bankruptcy, then your husband, wife, partner, relative or friend should contact the insolvency practitioner for information on what to do about buying the interest.
Stamp Duty Land Tax
Anyone wishing to buy back the trustee’s interest in your property may become liable for Stamp Duty Land Tax. They should seek independent legal advice before taking any action.
What is a Bankruptcy Restriction Notice?
A bankruptcy restriction notice is an entry at the Land Registry against a property that is solely owned by a bankrupt. A restriction is automatically placed when a bankruptcy order is made. It puts on record that the bankrupt is no longer the legal owner of the property and cannot sell the property or enter into any other dealings in connection with the property - only the trustee can do this.
The restriction will not be removed until the trustee has been paid for their legal and beneficial interest in the property. If your interest in the property is returned to you, the trustee will notify the Chief Land Registrar that the property is now yours again.
What is a Form J restriction?
A Form J restriction is an entry at the Land Registry, made on the application of the trustee, against a property that is jointly owned by a bankrupt. It is a record of the trustee's interest in the property. It means that the Land Registry must notify the trustee of any dealings in connection with the property. A Form J restriction is different from a charge, which relates to a claim for a specific amount of money.
A bankrupt's legal interest in a jointly owned property does not transfer to the trustee. So a bankrupt and the co-owner can still sell the property, but the trustee must be paid the value of their beneficial interest from the sale proceeds.
The Form J restriction will only be removed when the trustee has been paid for their beneficial interest in the property.
When would the official receiver apply for a charging order?
If there is equity of more than £1,000, but the bankrupt rejects the low cost transfer scheme, a charging order may be considered.
The problem with charging orders is that there is a cost incurred in getting them, but no guarantee of a return. The charging order remains in place for up to 12 years. It will only produce a return if the property is sold within that time and the sale proceeds are enough to clear all other mortgages and charges.
The value of the charging order is the value of bankrupt’s interest in the property as at the date of the application, plus statutory interest. As a result the trustee could incur the cost of making the application, but not recover any money to pay these costs. Therefore, if there is no money in the estate, creditors could be asked to contribute towards the cost of obtaining a charging order.
As any properties with significant equity will have been handed over to an insolvency practitioner trustee, it is unlikely that many cases will have creditors willing to contribute, in view of the small amount of equity and possible small return. So the number of cases where the official receiver applies for a charging order is low.
What is a Deed of Acknowledgement of a debt?
If the property is sold, any shortfall on the mortgage loan (or any other loan that is secured on your home) is still a bankruptcy debt and you will be released from this debt on your discharge. This applies even if you have been discharged from your bankruptcy by the time your property is sold.
Sometimes, after the date of the bankruptcy order a lender might ask you sign a document in which you agree to be responsible for the debt and any shortfall arising on the sale of the property. This is known as a deed of acknowledgement of a debt. If you sign it, the lender will be able to ask you to pay the debt after you have been discharged from your bankruptcy. If you are asked to sign a deed of acknowledgement you may wish to take legal advice before doing so. The lender can ask any joint borrowers who are not bankrupt to pay the shortfall in full, whether or not they have signed a deed of acknowledgement.
What if I have an endowment policy that is connected to my mortgage?
If you hold an endowment policy in connection with your mortgage, the trustee in bankruptcy holds an interest in this policy as well as the property. If the policy is in joint names and only one of the joint policy holders is bankrupt, the trustee usually holds a 50% interest in the policy.
Endowment policies are sometimes charged to the mortgage company to cover the amount outstanding on the mortgage (either at the end of the mortgage period or on the death of the policy holder/one of the joint policy holders). If the trustee in bankruptcy is selling their interest in a property, they will also seek to sell their interest in the connected endowment policy, which will be calculated with reference to the mortgage and property value.
For example, if a solely-owned house is worth £50,000, the mortgage is £51,000 and the endowment is worth £3,000, the trustee's interest will be as follows :
Value of interest in property = £50,000 - £51,000 = Nil
Value of interest in endowment policy = £3000 - £1,000 (being the shortfall on the mortgage) = £2000.
If there is no shortfall on the mortgage, i.e. the house is worth more than the outstanding mortgage, the endowment policy is effectively free from any claim by the mortgage company. In this instance, the trustee's interest will be 100% of the value of the endowment (or 50% where the policy is in joint names).
The trustee usually seeks to sell their interest in an endowment policy to the same person to whom they sell their interest in the connected property.
If the trustee is not selling their interest in a property, and there is an endowment policy charged to the mortgage company, the trustee will just register their interest in the policy with the relevant insurance company. The trustee will then claim their interest when the policy is realised at a later date.
If the endowment policy is not charged to the mortgage company, the trustee is entitled to realise the policy.
NB If the property re-vests after 3 years this does not affect the vesting of the endowment policy.
What happens if I rent my home?
If you fail to keep to the terms of your tenancy agreement, for example by not
paying your rent, the landlord may take action against you. The official receiver or trustee will normally have no interest in your home to sell for the benefit of creditors. We suggest you seek legal advice on what may happen under your tenancy..
Further enquiries about the bankrupt's home
If you still have unanswered questions about the bankrupt’s home, you can contact The Insolvency Enquiry Line on 0845 602 9848 – between 8.00am and 5.00pm Monday – Friday except bank holidays
Published October 2013