I am bankrupt, but must I lose my house ?

Being made bankrupt, either under your own hand, or by a creditor, is a stressful experience. That said, one key advantage is that the process eliminates virtually all personal debts.? Good news, but will the trustee allow you to keep your house??

If the house in which you live is rented then, as long as rent continues to be paid at the agreed amount, the accommodation position will not change.? That said, spare a thought for anyone in rented accommodation where the property owner is made bankrupt and the secured lender repossesses the property through no fault of their own (the subject of a future article perhaps).?

If the house is owned, the provisions of the Bankruptcy (Scotland) Act 2016 “the Act” mean that all assets, including a house, transfer to the trustee’s care when bankruptcy occurs.??

Whether or not the bankrupt remains in the house is subject to numerous factors, which will vary depending upon individual circumstances.? For example, if the house has negative equity e.g. worth ￡300,000 but has a mortgage of ￡350,000, the trustee is unlikely to be interested in the house and may elect to abandon his interest at an early stage.??

Another option is for the trustee to accept an agreed sum (￡500 is the current aib figure) from the bankrupt in exchange for removing his interest in the house where it can be shown that minimal net equity exists e.g. ￡300,000 value and ￡295,000 mortgage.? The debtor continues paying the mortgage and, one assumes, hopes that the house value will slowly increase over time as the mortgage reduces.?

The secured creditor’s attitude is often a key issue because, even if the trustee does not wish to sell the house, the secured creditor may still seek to repossess it if the mortgage is not serviced on a regular basis. In general terms, a secured creditor does not relish the thought of repossessing and selling a house and would prefer to leave the bankrupt in occupation if possible i.e. negotiate something practical.?

The family home has certain protections and, as one might anticipate, the Act can assist.? For example, section 113 provides that before a trustee can sell or dispose of the bankrupt’s family home, he must obtain formal consent from those who live in the house : typically the husband/wife who has not been made bankrupt. Where such consent is not provided voluntarily, the trustee must seek court authority.? Such an order, if granted, means that the trustee can evict the bankrupt and his family, secure vacant possession and place the property on the open market for sale.

?The position is not made easier if, for example, title is in the sole name of the bankrupt rather than joint names. The Act provides an element of protection for all those living in the house. Should the trustee seek court authority to evict, section 113 requires the sheriff to have due regard to :?

1.?????? The needs and financial resources of the bankrupt’s spouse, or former spouse.?

2.?????? The needs and financial resources of the bankrupt’s civil partner, or former civil partner.?

3.?????? The needs and financial resources of any child of the family.

?4.?????? The interests of the creditors generally.?

5.?????? The length of the period during which the house was used as a family home by any of the persons referred to above.?

Even if the sheriff is minded to grant an Order in the trustee’s favour, the Act gives the sheriff latitude to delay the issuing of such Order for a period of up to three years.? For example, if a child is about to sit important school exams next year, the sheriff may decide that it is vital to have stability within the family home until the exam process has been concluded.

?It is quite common practice for the trustee to negotiate with the bankrupt about establishing the net equity position and how best to deal with it. In reality, not many people wish to go to court and speculate upon the risk of the sheriff granting an Order for/against the bankrupt.? There are many cases where the net equity position is agreed, and in this regard the guidelines from the aib suggest that such negotiations should take place at the commencement of a bankruptcy in order to try and introduce an early element of certainty for the bankrupt and his family.

?Thus, it is fair to say that every bankrupt who owns a house does not lose it. The majority of trustees will try to reach a settlement position because, after all, the trustee’s focus is merely to recover fair value from the house such that a dividend can be paid to creditors.?

The best course of action when bankruptcy occurs is to seek advice from an experienced professional as soon as possible.?

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of MHA (mha.co.uk) rather than those of the firm in general.???