BANKRUPT’S HOME UNDER THE ENTERPRISE ACT 2002What 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:
What are the options for dealing with the property? Within 3 years the trustee must:
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 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 PROPERTYSOLELY 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.
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