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The bankrupt’s home is usually the most valuable asset in the bankrupt’s estate. It will automatically vest in the trustee immediately on his appointment without any conveyance, assignment or transfer.

The trustee has a duty to deal with the property for the benefit of the bankruptcy creditors. In an ideal world, the trustee’s interest is sold to a joint owner or family member. Unfortunately this is not always possible and the trustee has to apply to court for possession of the property so it can be sold.

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When assessing whether to apply to the court for an order for sale, a trustee must consider the equity available in the bankrupt’s family home. The beneficial interest in a jointly owned property is not always split equally between the co-owners and the trustee must make enquiries as to the proportion of equity which vests on his/her appointment.

The IA 1986 limits the time in which the trustee can deal with the bankrupt’s home to a period of 3 years from the date of the insolvency order. If the trustee does not do so the property revests in the bankrupt.

The relevant section of IA 1986 is section 283A which applies only where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house which at the date of the bankruptcy was the sole or principal residence of:

(a) the bankrupt,

(b) the bankrupt’s spouse, or

(c) a former spouse of the bankrupt

The trustee must take steps to deal with their interest in the bankrupt’s family home within 3 years of the bankruptcy order by:

(a) realising the interest (i.e. selling it to somebody else, often the joint owner or family member); or

(b) applying for an order for possession and sale; or

(c) applying for a charging order over the property for the value of the trustee’s interest; or

(d) entering into an agreement with the bankrupt regarding the interest.

If the trustee fails to take any steps to deal with their interest within 3 years, it falls out of the bankruptcy estate and revests in the bankrupt. This is sometimes known as the “use it or lose it” rule.

Time will begin to run from the date of the bankruptcy order unless the trustee is not aware of the bankrupt’s interest in a property, (i.e. it was not disclosed by the bankrupt). In these circumstances the trustee will have 3 years from the date on which he/she became aware of it to deal with the interest. The 3-year period can be extended by a court order but only in exceptional circumstances.

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As an alternative to obtaining an order for sale an agreement may be reached whereby the bankrupt’s spouse, partner, a relative or a friend buys from the trustee the bankrupt’s beneficial interest in the property.

Another alternative would be for the trustee to agree to a charging order on the property; this would enable the bankrupt and his family to continue to live at the property. Any decision regarding the sale of the property ultimately rests with the trustee (and any mortgagee of the property) and not with the bankrupt. It is not unusual for a trustee to opt for a charging order in circumstances where he is not able to dispose of the bankrupt’s interest in the family home by the time he has completed the remainder of the administration of the estate.

If the trustee agrees to accept a Charging Order on the family home:

The maximum duration of a charging order is normally 12 years, but it can be renewed.

The charging order would be subject to the provisions of the Charging Orders Act 1979. Under this Act the court has discretion to impose conditions as to when the charge is to become enforceable (and whether interest will accrue).

When the property is eventually sold sometime in the future, the trustee would seize his share of the equity.

In most bankruptcies the family home will be the main asset in the bankrupt's estate available for realisation and distribution among creditors. Since selling the home is likely to make the bankrupt and his family homeless, a conflict of interest arises between the needs of the family and the needs of the creditors. This may have which has difficult legal and financial implications.

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For example If the matrimonial home was originally conveyed into joint names of the bankrupt and his partner, only the bankrupt's interest in the property will automatically vest in the trustee. That interest will have to be identified.

The spouse/partner will retain his/her own beneficial interest in the property and will in law be known as “a trustee for sale”. If he/she refuses to sell the property, the trustee in bankruptcy must apply to the court for an Order of Sale.

If and until that order is made the partner has a legal right to occupy the property because they have a beneficial interest under a trust for sale which has not yet been determined by the court.

If an order for possession and sale is made by the court and the property is eventually sold, the trustee can only take the bankrupt's share of the proceeds of sale. The trustee could only claim the partner’s share if he/she can prove to the satisfaction of the court, that the original conveyance should be set aside as a transaction to defraud creditors.

If a Spouse/civil partner has no proprietary interest in the family home

Under section 30 of the Family Law Act 1996, a spouse who does not have any proprietary (i.e. legal) interest in the family home may be given rights of occupation, known as ‘matrimonial home rights’. These rights may be legally protected by registration.

In effect, a spouse’s matrimonial home rights are a legal charge on the estate which binds the trustee in bankruptcy. However the trustee may still obtain an order for possession and sale.

In considering an application the court must have regard to:

  • the interest of the bankrupt's creditors;
  • the conduct of the spouse, civil partner, former spouse or former civil partner in contributing to the bankruptcy;
  • the needs and financial resources of the spouse, civil partner, former spouse or former civil partner;
  • the needs of any children, and
  • all the circumstances of the case other than the needs of the bankrupt.

It is important to note that after one year (from the date of the bankruptcy order) the interests of the bankruptcy creditors will usually outweigh all other considerations, except in exceptional circumstances. In effect, after one year, the rights of bankruptcy creditors are considered paramount to any matrimonial home rights and the rights of occupation of the bankrupt unless the court considers the circumstances are truly “exceptional”.

According to the Insolvency Service, the court has considered certain types of family suffering as “exceptional circumstances” but generally the trend is to favour creditors’ rights without regard to ordinary family suffering.

From the perspective of the Bankrupt and his/her family it is better if these issues are planned for and dealt with as quickly as possible.

A final word of warning

  • Bankruptcy and property law are complex and detailed legal advice based on the full facts of a case should be sought.  
  • The information contained in this article are of a general nature and should not be taken as a substitute for proper legal advice.
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