BANKRUPT’S HOME UNDER THE ENTERPRISE ACT 2002

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 principal residence of: 

  • the bankrupt, or
  • the bankrupt’s spouse or civil partner, or
  • the former spouse or civil partner of the bankrupt

What are the options for dealing with the property? 

Within 3 years the trustee must: 

  • realise the interest (sell it to somebody) or
  • apply for an order of repossession or sale, or
  • apply for a charging order in respect of the value of the interest, or
  • enter into an agreement with the bankrupt 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 the bankrupt does not inform the trustee of the property within three months of the bankruptcy order, the three years run from the date the trustee becomes aware of it

The 3-year period can be extended by a court order. 

NB The 3-year provision above does not apply to the sole or principal residence of a co-habitee or ex co-habitee in which the bankrupt has an interest.  In addition it does not apply to any property that is not the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or the former spouse or civil partner of the bankrupt.  With such properties the trustee’s interest remains indefinitely, until the property has been dealt with. 

Reversion of interest to bankrupt 

If, at the end of 3 years, the trustee has taken no action, the interest will re-vest in (return to) the bankrupt.     

The legislation provides for the bankrupt’s interest to re-vest earlier than 3 years but Service policy is that 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, it has been decided that the interest might as well revert to the bankrupt at 2 years and 3 months. 

What are the transitional provisions? 

In all cases where the bankruptcy order was made before 1 April 2004 the trustee had 3 years from the date the provisions came into force to deal with all qualifying properties not yet realised, i.e. until 1 April 2007.  Where the bankruptcy order was made after 1 April 2004 on a petition presented prior to 1 April 2004, the 3 years ended on 31 March 2007.  

Charging Orders 

If there is equity over £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 obtaining them, but no guarantee of return. The charging order remains for up to 12 years and 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. 

NB The value of the charging order is the value of bankrupt’s interest in the property as at the date of application, plus statutory interest. 

So 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, it is anticipated that creditors will be circularised to ask for contributions towards the cost of obtaining a charging order. 

As any properties with appreciable equity will have been handed over to an IP it is unlikely that many cases will have creditors willing to contribute in view of the amount of equity and possible return involved.        

In view of the above point the number of cases where a charging order is applied for is very likely to be low.

GENERAL INFORMATION ON PROPERTY

SOLELY OWNED PROPERTY

Any solely owned property belongs to the bankruptcy estate, and the trustee becomes the legal owner of the property. Therefore, the trustee has the power to sell the property to realise any equity. However, the bankrupt, a friend or a relative can buy the trustee’s interest in the property. The value of the interest is usually the equity in the property.

 

If the trustee’s interest is not bought out, and there is significant equity in the property, the trustee will sell the property, but it may be possible to put off the sale for a year. If there is little or no equity, the trustee may take no immediate action and just ‘sit on’ the property. In this period, the bankrupt is allowed to continue living at the property and pay the mortgage in lieu of paying rent.

 

If the property is not the sole or principal dwelling house of the bankrupt, the bankrupt's spouse or civil partner or a former spouse or civil partner, the trustee retains his interest in the property even after the bankrupt’s discharge (assuming it has not been bought out by the bankrupt, a friend or a relative). 

 

If the property is the sole or principal dwelling house of the bankrupt, the bankrupt's spouse or civil partner or a former spouse or civil partner the provisions of The Enterprise Act 2002 apply - see above in ‘Bankrupt’s Home Under the Provisions of The Enterprise Act 2002’.

 

JOINTLY OWNED PROPERTY

If a property is jointly owned - and only one of the joint owners is bankrupt. the bankrupt’s beneficial interest in the property belongs to the bankruptcy estate, which is usually 50% of the equity. The co-owner or a friend/relative can buy the trustee’s interest.

 

If the trustee’s interest is not bought out, then the trustee will sell the property, but if the bankrupt lives with his/her spouse or civil partner and children, it may be possible to put off the sale for a year. If there is little or no equity, the trustee may take no immediate action and just ‘sit on’ the property. In this period, the bankrupt is allowed to continue living at the property and pay the mortgage in lieu of paying rent.

 

If the property is not the sole or principal dwelling house of the bankrupt, the bankrupt's spouse or civil partner or a former spouse or civil partner, the trustee retains his interest in the property even after the bankrupt’s discharge (assuming it has not been bought out by the bankrupt/friend/relative). 

 

If the property is the sole or principal dwelling house of the bankrupt, the bankrupt's spouse or civil partner or a former spouse or civil partner the provisions of The Enterprise Act 2002 apply - see above in ‘Bankrupt’s Home Under the Provisions of The Enterprise Act 2002’.

 

 

As the trustee only has a beneficial interest in the property, the bankrupt and his co-owner can sell the property at anytime, and the trustee will claim his share of the surplus sale proceeds. 

 

What is a Form J restriction?

A trustee places a Form J restriction on a jointly owned property to ensure that he is notified if any property transaction takes place, e.g. the sale of the property. The Form J restriction is registered at Land Registry.

 

ENDOWMENT POLICIES

If the bankrupt holds an endowment policy in connection with his 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. If the trustee in bankruptcy is selling his interest in a property, he will also seek to sell his 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 (although for legal reasons, the trustee will ask for £1 consideration)

 

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, and hence 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 his interest in an endowment policy to the same person to whom he disposes his interest in the connected property.

 

If the trustee is not selling his interest in a property, and there is an endowment policy charged to the mortgage company, the trustee will just register his interest in the policy with the relevant insurance company and claim his 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 under the 3-year provisions of the Enterprise Act this does not affect the vesting of the endowment policy. 
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