How will going Bankrupt affect my Home?

Bankruptcy is a frightening process; especially when there is a risk you might lose your home. It is difficult to get good advice. Your creditors are naturally looking for the options which will allow them to recover the maximum debt and you are unlikely to have money to pay for independent professional advice.

There are organisations, such as the Citizen’s Advice Bureau, which you can turn to for help and you are well advised to do so. If you own your own home, whether or not you might lose it will depend on your personal circumstances. In any event the Land Registry will register an entry on the title to your property once an application (a petition) is made to declare you bankrupt. This is done so that the Official Receiver or, if and when one is appointed, the trustee in bankruptcy can control how you deal with the property. These entries are called bankruptcy notices and bankruptcy restrictions.

Bankruptcy Notices and Bankruptcy Restrictions

If you become bankrupt your creditors (the people you owe money to) are entitled to any equity in your assets, including your home. Your assets are controlled by the Official Receiver, who may appoint a trustee in bankruptcy to administer your estate.

To prevent you from disposing of your property where you may be about to become bankrupt, the Land Registry must register a Bankruptcy Notice on the title to your property when a bankruptcy petition is made against you. This does not prevent a change of ownership being registered but it does mean that the new owner will have notice of the interest of the Official Receiver and his ownership will therefore be subject to that interest. The practical effect is that a person will not buy the property without the Official Receiver’s or trustee’s consent.

If you are made bankrupt then a further entry, a bankruptcy restriction, will be registered. This does prevent a change of ownership from being registered with the consent of the receiver/trustee (for the remainder of this article we will use the word “trustee” to refer to either the official receiver or trustee in bankruptcy).

Should I Still Pay My Mortgage When I’m Bankrupt?

You can and should continue paying your mortgage while bankrupt. Your home is probably your most valuable asset and if you let it get repossessed it will not be worth as much. More importantly, even though you are bankrupt this may not mean you have to leave your home, but being repossessed most certainly will.

My wife and I own our home jointly but only I am Bankrupt

What happens where two or more people own property but only one is bankrupt? This happens quite often.

Although any equity that the bankrupt has in the property now belongs to the trustee, the trustee does not become the legal owner since this would not be fair on the non-bankrupt. Instead, the two owners hold the property in trust for the non-bankrupt and the trustee.

If the property is sold then the consent of the trustee will be required and will usually only be given if the bankrupt’s share in the equity is paid to the trustee. If the property was held as joint tenants, where the whole of the property passes to the survivor on the death of one joint owner, bankruptcy automatically severs the joint tenancy and it will instead be held as tenants in common in equal shares.

The bankrupt’s share could be sold to the non-bankrupt joint owner, or to a friend or relative, but the price paid must be fair market value. The trustee may be able to force a sale in order to realise the equity in the bankrupt’s share.

I am the Sole Owner of My Property and I am Bankrupt

If a property is solely owned by a bankrupt then legal ownership will pass to the trustee. He may register himself as the owner but even if he does not he is still the legal owner and can still sign a transfer deed to transfer ownership.

If there is equity in the property then it is likely that he will attempt to sell it to use the money to pay creditors. Any mortgages or secured debts will have to be repaid from the proceeds of sale before money is used to pay unsecured creditors.

I’m in Negative Equity, will my home still be Sold?

Negative equity means that the total debt secured against the property (such as mortgages, secured loans and charging orders) is more than the property is worth, so that if the property were to be sold there would not be enough money to pay off all of the debt.

Since the trustee has to pay off all secured debts when he sells a property it is unlikely he will sell a property that is in negative equity even if the shortfall could be made up from the sale of other assets since this would not benefit the unsecured creditors. He may however sell the property in future when there is some equity.

What Happens When My Bankruptcy Ends?

Bankruptcy does not last forever. In fact a bankrupt may be discharged after as little as a year. Nonetheless, any assets he had at the time of becoming bankrupt still belong to the trustee even after discharge and this includes the bankrupt’s home, which may still be sold to satisfy creditors.

Transferring Property In Contemplation of Bankruptcy

If a person believes he may be about to become bankrupt then he may be tempted to transfer his assets to other people to avoid them being sold to satisfy creditors. In terms of land however the trustee is entitled to set aside any such transfer that has taken place up to five years prior to the bankruptcy if that transfer appears to be at undervalue.

Individual Voluntary Arrangements (IVAs)

Before entering bankruptcy it is worth considering the possibility of an Individual Voluntary Arrangement (IVA). This is a voluntary agreement with creditors which if agreed legally binds all creditors and may avoid bankruptcy and loss of the home.

You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

AddThis Social Bookmark Button

Comments are closed.