What happens to our family home in bankruptcy?

One of the most emotive aspects of a bankruptcy that we commonly encounter involves the understandable uncertainty and stress for the entire family unit when the owner, be that the sole or joint owner, of the family home is made bankrupt. What happens to the family home and can anything be done to save it?

In any bankruptcy the primary focus for a Trustee in Bankruptcy is to realise the Bankrupt’s assets for the benefit of the Bankrupt’s creditors.

The matrimonial home is normally the main and most valuable asset in a bankruptcy.

Once a debtor is adjudicated bankrupt any assets that they owned on the date they were made bankrupt are immediately and automatically vested in their Trustee in Bankruptcy and this will include their interest in their matrimonial home. So whilst the Bankrupt’s name may still temporarily appear as the registered owner of the property, from a legal point of view they do not actually own the property anymore and any beneficial interest that they had prior to going bankrupt has now passed to their Trustee in Bankruptcy. In practical terms this means that a Bankrupt will be unable to sell or re-mortgage his home as a simple bankruptcy search, which is a standard precursor to any property transaction, will flag their bankruptcy status to their own solicitor, a lender or any potential purchaser.

If a Bankrupt is the sole registered owner of the home then the starting point in bankruptcy will be that the Bankrupt is entitled to 100% of the equity in the property and by extension their Trustee in Bankruptcy will assume that that same 100% interest has now vested in them. If the Bankrupt jointly owns the property with their spouse, then the starting point will be that the Bankrupt is entitled to 50% of the equity in the property and therefore the property effectively becomes owned by the Trustee and the non-bankrupt spouse.

A Trustee is then faced with the task of realising their interest, whatever that interest is, and in simple terms this normally means either selling the property or selling their interest in the property. This can be done in the traditional sense of placing the property on the open market for sale or alternatively offering to sell their interest to a third party, most commonly a non-bankrupt joint owner or the Bankrupt’s spouse or other family member.

Unfortunately, if there is no family member or third party in the financial position of being able to purchase the Trustee’s interest then it is likely that a Trustee in Bankruptcy will in due course apply to the Bankruptcy Court for a Court Order permitting the Trustee to first take vacant possession of the property and to thereafter sell same.

A Possession Order is then lodged with the Enforcement of Judgments Office (EJO), which is a department of the Court that specifically deals with the enforcement of Court Orders or Judgments in Northern Ireland, for enforcement and this will eventually culminate in an eviction date being set.

The legislation states that unless there are exceptional circumstances, the Court is unlikely to grant a possession order within the first 12 months of a bankruptcy. However the legislation also requires the Trustee to take one of several prescribed steps within the first three years of a bankruptcy otherwise the interest reverts back to the Bankrupt.

In practice this means that a Trustee in Bankruptcy will not normally take any steps to realise their interest in a matrimonial home until at least the second year of the bankruptcy and we therefore encourage clients to view this first 12 month hiatus as a window of opportunity to enter into negotiations with the Trustee. In our experience, Trustees are normally more receptive to negotiations at this early stage as they will not yet have incurred legal costs and are initially hamstrung as to what they can do with the matrimonial home for the first twelve months in any event.

We regularly act for clients who wish us to assist them with such negotiations. This involves us first reaching a consensus with the Trustee as to the level of equity in the property (put crudely this is the market value of the property less any outstanding mortgage balance) and then agreeing what the Trustee’s share of that equity is.

There are a lot of complex legal principles and precedents set in caselaw that can assist us in these negotiations and depending on the circumstances of the case it may be possible to reduce the Trustee’s share in the property and thereby potentially making the purchase of the Trustee’s interest more affordable.

In order to comprise as attractive and as realistic a proposal as possible that properly reflects the reality of the beneficial ownership of the matrimonial home we explore a variety of issues with clients such as:

  1. Did one party contribute more to the purchase of the home than the other?
  2. Did one party contribute more to the reduction of the mortgage balance than the other?
  3. Did the parties ever expressly agree among themselves that the ownership of the property would be different than was recorded in Land Registry?
  4. Did one party contribute more to home improvements than the other?

At Millar McCall Wylie we regularly act for clients who want to save the matrimonial home from having to be sold in a bankruptcy scenario. We use our experience and knowledge to translate the financial history of the family home into a proposal to purchase the Trustee’s interest in same. We have a direct experience of the legal costs, evidential hurdles and procedural delays that a Trustee will inevitably encounter in seeking to realise their interest through the issue of legal proceedings and we use this knowledge to present a more attractive alternative for the Trustee.

If you have any queries or require any assistance with bankruptcy issues affecting your family home then please contact Jason Byrne in our Insolvency & Restructuring Team.