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Bankruptcy And Your Home

A look at how bankruptcy may affect the property you live in.

When people think of bankruptcy, when they consider it as a way of dealing with overwhelming debt, their main concern often relates to the house in which they live.

More specifically, the prospect of losing a home is something many, understandably, are not willing to contemplate.

So is this likely if a homeowner goes through bankruptcy? Well there’s no magic number for quoting the chances of a home being taken as an asset, but yes, it is a distinct possibility.
The official receiver or the trustee (if an insolvency practitioner has been appointed in place of the official receiver) may have to sell your home to help pay your bankruptcy. This is a home truth that applies to a property whether the home is freehold or leasehold and whether it is solely or jointly owned. They will do this is if a sale is the only way to release an individual’s interest in a property to the creditors owed money.
Circumstances differ case-by-case, and each bankruptcy will be subject to different criteria. For example, if your partner or children reside with you, it is possible for a house sale to be delayed for a year after your bankruptcy to allow all residents the opportunity to find alternative accommodation.

Bankruptcy when renting from a private landlord

Usually, you will be allowed to stay in your home if you keep rent payments up to date. If money is owed, the amount should be included as a debt in the bankruptcy proceedings. Your landlord can unfortunately evict you, though he or she cannot take court action to get unpaid rent off you.
Can you avoid eviction then? Well yes, by simply paying the arrears after your bankruptcy goes through. Alternatively, sometimes the official receiver may set up something called an income payment agreement whereby you wouldn’t pay a landlord arrears directly, but someone you know may do so instead.
Essentially, what happens to your tenancy depends on the tenancy agreement. Some agreements will include a clause that state the tenancy will be terminated if the tenant goes bankrupt. Additionally, when taking on a tenant, landlords will usually do checks on a potential tenant, and some may check the Insolvency Register, so those declared bankrupt within the past 15 months may struggle to find new accommodation when renting. As a result of this, you may have to pay a larger deposit than standard or need a guarantor on your agreement.

Bankruptcy and renting from a local authority or housing association

Again, you’ll be able to stay in your home if your rent payments are up to date. If money is owed, the amount should be included as a debt in the bankruptcy proceedings. Your landlord can unfortunately evict you, though he or she cannot take court action to get unpaid rent off you.
Can you avoid eviction then? Well yes, by simply paying the arrears after your bankruptcy goes through. Alternatively, sometimes the official receiver may set up something called an income payment agreement (IPA) whereby you wouldn’t pay a landlord arrears directly, but someone you know may do so instead.
Essentially, what happens to your tenancy depends on the tenancy agreement. Some agreements will include a clause that state the tenancy will be terminated if the tenant goes bankrupt. Additionally, when taking on a tenant, landlords will usually do checks on a potential tenant, and some may check the Insolvency Register, so those declared bankrupt within the past 15 months may struggle to find new accommodation when renting. As a result of this, you may have to pay a larger deposit than standard or need a guarantor on your agreement.

Bankruptcy and owning a home

If you reside in a mortgaged property, and that property has equity in it, then normal procedure would be for the official receiver to sell the property to use to help pay creditors’ debts. Some money may also be used to pay the costs of the receiver. If the home is in your sole name, the official receiver will want all of the equity towards debts and costs. If the home is owned jointly, then the receiver will want your personal share of any equity in the property.
Every case is unique, but depending on that equity amount, the official receiver may:

  1. Sell your home
  2. Put a charging order on your home so they get the equity paid to them if you sell your home at a later date.
  3. OR – if you want to stay in your home, the official receiver will usually allow someone else to pay them an amount equivalent to your equity, as it is not in their interest not to, and it may even reduce costs as it will mean not having to advertise the property (see below).
If there is very little equity in your property – and very little tends to refer to under £1,000, or if there is actually negative equity in the home, then the official receiver will not pursue a house-sale in order to raise funds for your creditors. However, they will probably re-visit the situation after a couple of years to see if the equity situation has changed. If the equity figure has risen above £1,000, they may decide to sell after all. The receiver has three years to re-visit and sell due to a change of circumstances, but usually the matter will be closed after 27 months.
If your home is sold, you’ll normally be given up to 12 months to find a rented property and move. If you give up your home after bankruptcy and there’s negative equity, this debt would be included in your bankruptcy. You won’t have to pay it back.

Find Someone To Buy Your Home

There are other ways of avoiding losing your house though, ways that mean you could plausibly stay there for good. The primary way to do this is if a partner, relative or friend purchased the bankrupt’s interest in a property. This would stop the official receiver or trustee selling your home.
Beneficial interest is an individual’s interest in the proceeds of a property sale. As a sole owner, this would be the whole value of a property. If there are joint owners, the beneficial interest is usually an equal share of the value. It does however only relate to value after remaining amounts left on a mortgage.
Beneficial interest transfers to the official receiver or trustee, who will sell it to raise funds for the creditor. Even if the value of the beneficial interest is more than the costs, fees and debts of your bankruptcy, the trustee may be able to claim the full amount of the beneficial interest. This is because creditors are entitled to interest on the money they are owed if there are enough assets in the bankruptcy to pay this.

The Land Registry

When someone with a property is declared bankrupt, they will be subject to something called a bankruptcy restriction notice on the land registry, which puts on record that the bankrupt is no longer the legal owner of their property and does not have the ability to sell the property or enter into any other dealings in connection with the property - only the trustee can do this. This restriction will not be lifted until the receiver or trustee has been paid for the beneficial interest, and if a property is returned to a bankrupt, then the trustee will inform the land registrar.

Deeds of Acknowledgement

If the property is sold, any shortfall on the mortgage loan (or any other loan that is secured on your home) is still a bankruptcy debt. This applies even if you have been discharged from your bankruptcy, as you are released from the debt on discharge.
Sometimes, after the date of the bankruptcy order a lender might ask you sign a document in which you agree to be responsible for the debt and any shortfall arising on the sale of the property. This is known as a deed of acknowledgement of a debt. If you sign it, the lender will be able to ask you to pay the debt after you have been discharged from your bankruptcy.
If you are asked to sign a deed of acknowledgement you may wish to take legal advice before doing so.
The lender can ask any joint borrowers who are not bankrupt to pay the shortfall in full, whether or not they have signed a deed of acknowledgement.



Free debt counselling and advice is also available from the Money Advice Service available at: www.moneyadviceservice.org.uk

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