What Happens To My Home If I Go Bankrupt?
The answer to the question will I lose my home if I go bankrupt is that you could but it is not an automatic conclusion.
If an individual goes Bankrupt then the assets, including the Bankrupt’s home, form part of the Bankruptcy Estate.
What Is The Bankruptcy Estate?
The Bankruptcy Estate is the collection of assets that together comprises the property that belonged to the individual who has gone into Bankruptcy.
Once a Bankruptcy Order is made in respect of an individual, their assets are ringfenced at the point of Bankruptcy and they are in effect no longer owned by the Bankrupt. They are held (‘vest‘) for the benefit of the Bankrupt’s creditors, in the Trustee.
What Is The Vesting of the Bankruptcy Estate In The Trustee?
The vesting of the Bankruptcy Estate is the pooling of the Bankrupt’s assets in the Trustee in Bankruptcy.
The Trustee in Bankruptcy (“Trustee”) can be an Insolvency Practitioner who is appointed by creditors after replacing the Official Receiver. The Official Receiver is a government official employed by the Insolvency Service that will initially act as Trustee.
In the case of most Bankruptcies, the Official Receiver will be the Trustee but often in cases where a Bankrupt has assets, which can mean that there is a risk of the loss of their home, a private Trustee is often appointed by creditors.
Immediately upon the making of a Bankruptcy Order the Bankrupt’s assets vest in the Trustee by virtue of Section 306 of the Insolvency Act 1986:
The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.
What Is The Trustee’s Duty To Realise The Bankrupt’s Home?
The Trustee has a duty to realise the Bankrupt’s assets for the benefit of the Bankrupt’s creditors. This duty is set out in Section 305 of the Insolvency Act 1986:
The function of the trustee is to get in, realise and distribute the bankrupt’s estate
A Trustee will therefore often, unfortunately, have to make an application to Court for an Order to be able to take possession of the Bankrupt’s home and sell it for the benefit of creditors.
How Does The Court Treat The Trustee’s Application To Sell The Home?
In The First 12 Months Of Bankruptcy
If a Trustee makes an application to Court to be able to sell the Bankrupt’s home in the first 12 months of Bankruptcy, then the Court will make an order that it considers is fair based on the following:
(a) the interests of the bankrupt’s creditors;
(b) where the application is made in respect of land which includes a dwelling house which is or has been the home of the bankrupt or the bankrupt’s spouse or former spouse—
(i) the conduct of the spouse or former spouse, so far as contributing to the bankruptcy,
(ii) the needs and financial resources of the spouse or former spouse, and
(iii) the needs of any children; and
(c) all the circumstances of the case other than the needs of the bankrupt.
One year After Commencement Of Bankruptcy
If a Trustee makes an application to Court to be able to sell the Bankrupt’s home more than one year after commencement of Bankruptcy, then the Court will make an order that it considers is fair but the Court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt’s creditors outweigh all other considerations.
How Can A Bankrupt Avoid Losing My Home?
There are a number of ways that a Bankrupt can avoid losing their home.
The Non-Bankrupt Spouse Purchases The Home
Perhaps the most common way that a Bankrupt avoids losing their home is if their wife or husband who is not Bankrupt buys the Bankrupt’s share of the interest in the home from the Trustee.
The effect of this is that the non-Bankrupt husband/wife will then own 100% of the equity in the home.
Other variations of this can arise if family and friends come together to assist the non-Bankrupt spouse to buy out the Bankrupt’s interest and avoid a forced sale of the home. This option can be available even arise if the Bankrupt has no spouse and owns 100% of the house.
Selling Other Assets To Avoid Losing The Bankrupt’s Home
A Bankrupt can avoid losing their home if their debts are modest and they have other assets that the Trustee can sell to realise sufficient monies to settle the expenses of Bankruptcy and pay off the creditors.
If there are exceptional circumstances that mean that it would be particularly unjust then the Court may suspend an Order for sale for a period of time. However, the difficulties associated with the loss of a home and the associated disruption do not amount to exceptional circumstances. Examples of possible exceptional circumstances might be a house that has been modified for a disabled child or a house where one of the owners has a terminal illness. In such circumstances often the best that can be achieved is a delay, as opposed to necessarily permanent avoidance of repossession.
An example of is was not deemed exceptional was set out in the Bankruptcy case of Gostelow & Anor v Hussain & Ors  EWHC 3276 (Ch):
As I have said, Mr Hussain says that it would be inhumane to make an order. Although he did not put in any witness statement below or seek to do so on this appeal (he has been unable to pay for proper legal assistance), he outlined to the court yesterday the circumstances on which he relies. In summary, shortly before the bankruptcy order, he had to sell his take-away business, since when he has worked as a taxi driver and, for one day a week, as a reserve officer in the British Army, from which he receives a modest income. In the covid pandemic, his earnings as a taxi driver dropped, but they are beginning now to come up again. In the meantime, he has been paying the National Westminster Bank mortgage, which has now reduced to about £158,000 (down from the figure of £168,000 odd in July 2020).
As for Mrs Sumana, Mr Hussain and Jennifer informed me that she is a housewife with no income, she has been very stressed by the proceedings, and her health has deteriorated, so much so that she has bee in hospital many times in the last two years.
As for the three children, they all still live at the property. Further, Jennifer, who is now 19, is still at secondary school (she will be retaking her A levels in the forthcoming academic year), as is their son Aahil, who is now 11 years old.
Further, Mr Hussain questions what real benefit an order for possession and sale would bring to the creditors. In his estimation, the property is worth only £320,000 odd, so, after taking into account the National Westminster debt of £158,000 odd, the equity is only £162,000, so only £81,000 would fall to be distributed to the creditors. And the £81,000 or so that would be left for Mrs Sumana would be insufficient to buy the family a replacement home.
In my judgment, these matters do not, even taken in combination, amount to an exceptional circumstance for the purposes of s.335A. I accept that eviction from the house will be disruptive and distressing for all the members of Mr Hussain’s family. However, these are the usual consequences of any order, and there is a consistent line of authority to the effect that such are not sufficient to amount to “exceptional” circumstances. In particular, although the categories of exceptional circumstances are not closed, it is clear that they must be outside the usual “melancholy consequences of debt and improvidence” as put by Nourse LJ in Re Citro (Domenico) (A Bankrupt)  Ch. 142 at p157C-D, or there must be “compelling reasons not found in the ordinary run of cases” (as put by Bingham LJ at p161E-F in the same case). In particular, it is not enough that the realisation of the spouse’s beneficial interest will not produce enough to buy a comparable home in the same neighbourhood or indeed elsewhere (see per Lawrence Collins J in Dean v. Stout (The Trustee in Bankruptcy of Dean)  BPIR 1113 at paragraph 10).
How To Avoid Bankruptcy
If an individual is able to avoid Bankruptcy then this may address the concern about the loss of the home. The main way to avoid Bankruptcy if someone is insolvent is to enter into an IVA.
What Is An IVA?
An Individual Voluntary Arrangement (“IVA“) is an agreement between an individual and their creditors that is formally recognised in the Insolvency Act 1986.
In simple terms, it requires 75% of that person’s creditors who vote to be in favour of the terms of the IVA. Typically it involves a payment plan to satisfy some or all of the debts. If agreed, it is then binding on all creditors at the date the IVA is approved.
To make the IVA an attractive proposition to creditors it can often be agreed that the IVA will delay the payment of the Bankrupt’s interest in the home. Certain institutional creditors such as banks may be favourable to permitting an individual to wait until say year four (of a typical five year IVA term) before requiring payment for the home to be made. This may give someone a breathing space to explore their options and get funds together to pay for the home.
Informal Arrangements With Creditors
Some individuals are able to avoid the loss of the home by entering into an informal arrangement with their creditors to gain time to get funds together to satisfy their debts and avoid Bankruptcy.