Can you keep your home in a bankruptcy?

It's not uncommon to hear someone in dire financial straits say they can't face bankruptcy because they will lose their home. I expect some of you reading this will agree, thinking that's what happens when you go bust, you always lose everything including your home, don't you?

Let me tell you here and now that it's a myth! I know of many instances where people have gone bankrupt and some three or more years later are still in their home. It's all down to individual circumstances, getting good professional advice and not listening to your mates down the pub.

Bankrupt homes before April 2004

Prior to 2004, it was an absolute nightmare for bankrupts that owned homes, typified in one memorable case back in 1994 where a lady went bankrupt owing the Inland Revenue, VAT and other creditors some £45,000. At the time the home was valued at more or less the same amount as the mortgage, £70,000.

You can correctly assume that when bankrupt your unsecured debts, including those owed to the tax man, are written off. However any assets or potential assets you have will be signed over to the Official Receiver and even though there was no equity in the home at the time this lady went bankrupt, potentially there could be many years later.

This is exactly what happened here when contact was made by a court appointed trustee in 2002, some eight years after the bankruptcy order was made claiming for £105,000; this was the original £45,000 plus interest. Even though the debts had been written off, unbeknown to our lady a charging order was placed upon the home and over the years this gained in value to near the £250,000 mark.

I am pleased to report that there was a relatively happy ending to this story as we got the Crown Departments and other creditors to drop the interest element, the lady remortgaged and paid back the £45,000, the bankruptcy was annulled and struck from the records as if this person was never ever made bankrupt.

The key changes post April 2004

After April 2004, welcome changes came into force on how bankrupts were to be treated; one being the way the dwelling house is dealt with.

Briefly, the Official Receiver (OR) or the appointed Trustee has three years from the date of the bankruptcy order to deal with any property owned by the bankrupt. If nothing is done within this time then any interest in the property/ies, reverts back to the bankrupt: i.e. it is no longer part of the bankrupt's estate unless the trustee;

  • applies for an order of sale or possession
  • applies for a charging order on the property to cover the value of the interest.
  • realises the interest or reaches an amicable agreement with the bankrupt regarding the interest.

Official Receivers don't look to turf individuals and their families out of their homes: it's not cost effective as the state generally has to pick up the tab to re-house. Most bankrupts have very little equity, (the difference between the mortgage outstanding and the current value of the home) and if they did have a reasonable equity then they would either remortgage or sell the home and not go bankrupt!

The new policy change as from January 2011

Up to the end of December 2010 within the first year of his/her bankruptcy a bankrupt could agree with the OR how much interest there was in the property.

However a change in policy, effective from the 1 January this year, means that there will be no agreement to deal with a bankrupt's interest in a family home until at least two years and three months have passed since the bankruptcy order was made, except if an offer is received which is in the creditors' interests to accept. If after this time the value of the interest in the property is valued at less than £1,000, then the OR will take steps to hand the interest back to the bankrupt.

Anything above this figure will become the basis of negotiation between the bankrupt, his/her family or friend and the OR.

One important point is that if a property is jointly owned, say with £20,000 equity, and only one of the owners is going bankrupt, then the amount available for the OR would be 50%, £10,000. One would argue that this could then be reduced further by estate selling costs and legal fees which is why, under certain circumstances, the bankrupt, family member or friend may be able to buy back the interest for several thousands of pounds as against the £20,000.

The OR has the discretion to effect an early re-vesting of the property back to the bankrupt in specific circumstances.

Why don't you just sign over the house to your partner?

I am often asked if this is possible and the short answer is no. When someone applies for bankruptcy they have to disclose what assets they have and if they have sold anything of value within the past five years and this includes transferring the home into the Mrs's name only and it also includes cars.

If you do that and go bankrupt within the five years of the date of transfer then expect the OR to come looking and I have to agree - one should not remove assets from creditors. How would you like it if you were owed money by someone that did just that, just changed the names of the owner of the home to avoid having to pay up?

Bottom line then, those individuals thinking of going bankrupt should first take professional advice to ensure that this is the right course of action for them and if then it is deemed the only way forward, get professional advice about the situation with the home.

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