What happens to your home during bankruptcy?

Home iconFiona Gaskell, partner at Clough Willis, offers advice on how to ease the process of bankruptcy when your home is at risk.

If you are made bankrupt, the prospect of losing your home without warning is what is likely to cause you the most anxiety and distress.

But it’s important to realise that it may not be the case, and that there are steps you can take early on that may prevent this from happening.

The trustee’s duty

A trustee in bankruptcy will only be interested in a bankrupt’s home if it is either owned completely, or partly, by the bankrupt. So if you live in a rented property, you should remain unaffected by your bankruptcy.

Otherwise, a trustee must do something to realise the bankrupt’s interest in the family home within 3 years of the bankruptcy order. If the trustee does nothing, they will lose the right to do so, and generally speaking, no order will be made forcing you and your family to move out of your home in less than 12 months from the date of bankruptcy. 

If you are the sole homeowner and have no spouse, then neither the 12 months nor the 3 year period will apply, so possession could be sought immediately, or after a deferred period.

Act swiftly and openly

But this does not mean that nothing can or should be done during the first 12 months of bankruptcy. And it’s not generally in your interests to keep your head down and hope that the trustee forgets about your home (which is extremely unlikely). By doing nothing, you may give yourself very little time to negotiate with the trustee, which may result in court proceedings and an order for possession being issued.

If a property is owned solely by the bankrupt, then the bankrupt’s interest in the property will vest completely in the trustee. This means that whatever the value of your property (less any mortgages or other registered charges) will be available for a trustee to realise for the benefit of creditors.

Jointly-owned property doesn’t always have to be sold

If your property is jointly owned, the trustee acquires whatever interest you as the bankrupt had in the property, but this does not affect the interest of the co-owner.

It is important to understand that the property doesn't necessarily have to be sold. Irrespective of whether the property is solely or jointly owned, it may be possible for a third party (eg the spouse with an increased mortgage) to purchase the trustee’s interest in the property without the property having to be placed on the market and the property vacated. 

The ability of a third party to purchase the trustee’s interest depends on matters such as:

  • the value of the trustee’s interest
  • whether there are any mortgages or other registered charges on the property
  • whether mortgages or charges can still be paid following the bankruptcy – there’s no point in trying to buy out the trustee’s interest if there isn’t enough income to pay them

If the value of the trustee’s interest is very low – currently fixed at £1,000 – then a court will not be prepared to make an order for sale or possession of the property if the trustee were to apply.

In reality, a trustee is unlikely to go to the expense of possession if their interest is under £10,000, and the official receiver will not do so. However, a trustee would usually still try to get something out of the property by negotiation.

The trustee may declare that they have no interest in the property, or if the value is perhaps a little more, they may be prepared to accept a nominal sum for their interest and a contribution towards their legal fees of transferring their interest in the property to a third party or co-owner.

Seek your own valuation of the property

If the value of the property exceeds £1,000, it is extremely important to get an accurate valuation as soon as possible. It is far better for you as the bankrupt, and your family, to obtain your own valuation, rather than rely on a valuation put forward by a trustee. 

A trustee is unlikely to be familiar with the area in which your property is situated, and you may be reluctant to allow a third party into your property to carry out a full valuation. For these reasons, a valuation for a trustee is often carried out by looking at comparison websites and, at best, on an external or ‘drive-by’ valuation. 

This can be misleading, particularly if the property is in need of renovation work, or is not fully habitable. Any valuation must be from a qualified surveyor or valuer. You should explain the purpose for which the valuation is required, so that there is no misunderstanding on the part of the valuer.

Once this valuation has been obtained, you can use this to agree a figure that the trustee will accept for his interest in the property.  

Negotiating a jointly-owned property

If your property is jointly owned, it will generally be assumed that the property is owned in equal shares. However, owners can sometimes contribute to the purchase of the property in different shares. This is particularly if only one party has:

  • put down a deposit when the property was purchased
  • spent savings on improvement works, such as extensions (but not decoration or repairs)
  • paid the mortgage

Of course, the greater the co-owner’s interest, the smaller the interest of the trustee, and the less money would have to be found to avoid a forced sale. 

A co-owner should also be aware that while they may have agreed to a jointly-owned property being mortgaged for the benefit of the bankrupt’s business, their interest in the jointly-owned property may not be affected by the value of that debt – the burden for repayment of that debt may fall completely on the bankrupt’s share in the property. All of these points should be considered when negotiating with a trustee.

If sale is inevitable

If there is no possibility of avoiding a sale of the property, it may be better for you, and any co-owner, to agree to put the property on the market as soon as possible and cooperate fully in the sale. 

That way it’s likely that a higher price will be reached. This will of course benefit a co-owner, and a trustee is more likely to allow a cooperative bankrupt and co-owner to remain in the property, pending sale.

This will give everyone a chance to consider what alternative accommodation may be available in good time before the property is sold.

About the author

Fiona Gaskell is partner at Clough Willis, and specialises in insolvency, property litigation and licensing. Follow @BurySolicitor.