Bankruptcy and Repossession
Bankruptcy proceedings may lead to the repossession and forced sale of an individual's home.
Discharge of a Bankruptcy OrderBankruptcy rules have been partially liberalised to make it easier for someone who has been made bankrupt to start again without the burden of their debts hanging over them. In many cases, if the bankrupt person has behaved honestly and cooperated with the Official Receiver and their trustee in bankruptcy, a bankruptcy order will automatically be discharged after one year.
However, where a bankrupt person has a substantial asset - such as their home - things may be more complicated. If the debts have not been paid off by other means during the twelve months following the making of a bankruptcy order, this could result in the repossession and sale of the bankrupt person's property.
Bankruptcy and PropertyWhen a bankruptcy order is made against an individual all their assets are said to "vest in the bankruptcy". At the same time that all existing debts will be included in what is known as the bankruptcy estate, all existing credits or assets will also become part of it. The bankrupt person no longer has the right to deal with his assets as he wishes. In effect, they become the property of the trustee in bankruptcy. The trustee assesses all existing debts and takes steps to satisfy them.
A bankrupt person’s interest in any property is automatically transferred to their trustee in bankruptcy when they become bankrupt. If the bankrupt person owns the property alone the whole property passes to the trustee. If the bankrupt person owns the property together with someone else, only the share owned by the bankrupt person passes to the trustee.
Orders for Sale Within 12 Months of a Bankruptcy OrderTo realise the value of a property which belongs to a bankrupt person their trustee in bankruptcy may apply to the court for an order which allows the trustee to sell the property. The approach taken by the courts to such applications may depend on when the application is made.
If an application for an order for sale is made during the first year after a bankruptcy order, the court may give preference to the welfare and interests of any other people living in the property - such as the family of the bankrupt person. The court may decide not to allow the sale of the property if they believe that the negative impact on the family would outweigh the benefits to be gained by the bankrupt person’s creditors. This may be particularly relevant where the equity in the property would be insufficient to substantially satisfy the bankrupt person’s debts.
Orders for Sale More than 12 Months After a Bankruptcy OrderWhere an application for an order for sale is made more than 12 months after a bankruptcy order, the interests of creditors must take priority unless there are “exceptional circumstances”. When deciding an application for an order for sale by a trustee in bankruptcy the court may take into account the behaviour and needs of the bankrupt person’s spouse (including whether they contributed to the bankruptcy) and the needs of any children. The court is not required to take into account the behaviour or needs of the bankrupt person.
Opposing a Trustee in Bankruptcy’s Application for an Order for SaleA bankrupt person may oppose an application for an order for sale by asking the judge to allow more time for the property to be re-mortgaged, sold voluntarily or so that funds can be raised in some other way to clear the bankruptcy debts. The judge may even be persuaded to allow the bankrupt person to make monthly contributions towards the debts. However, a judge may be less sympathetic to this kind of proposal if a substantial amount of time has passed since the bankruptcy order was made or if the bankrupt person lives in the property alone.
Extending the Time in Which a Trustee in Bankruptcy May Sell a PropertyA trustee in bankruptcy could lose the right to sell the property if they wait longer than three years from the date of the bankruptcy order before doing so. To prevent this they could apply for a charge over the property. A trustee in bankruptcy may be able to obtain a charge over a property after more than three years if the existence of the property had been kept secret by the bankrupt person.
The courts also have general powers under the bankruptcy rules to either prevent the automatic discharge of a bankruptcy order or to extend the time during which a property remains in the bankruptcy estate if it considers it appropriate to do so.