While coverage of the recent changes to the Bankruptcy Laws has focused on the reduction of the bankruptcy term from three years to one year, a number of other amendments were made. These will have a serious effect on a person’s decision to file for bankruptcy. The role of the Official Assignee (who takes over all your debts and liabilities upon bankruptcy) with your family home is one of these important changes.
The concept of automatic re-vesting
In the 1990s in the UK, problems arose during recession, when a bankrupt’s interest (known as ‘equity of redemption’) in the family home was not being sold during the bankruptcy period. The officials handling the Bankruptcy held off selling family homes until such time as property rose in value. This had the effect of stalling the sale of the family home for quite a number of years after someone came out of bankruptcy.
Discharged bankrupts and their families would often be shocked and distressed to learn that the family home where they resided was being sold. This was often years later and long after they had come out of bankruptcy returned to “normal life”.
As a result, Britain introduced reforms that allowed a period of three years only to sell a bankrupt’s family home. If the home was not sold within this time, it would automatically be transferred back to the bankrupt and would no longer be available for sale.
Ireland adopts re-vesting
In this country, as a result of recent changes, when an individual is discharged from the one year bankruptcy period and if the home is not sold within two years, it reverts to the Bankrupt unless he/she agrees otherwise or the Court orders it to be sold.
The new provision applies to all bankruptcies entered into from 29th July 2013. Where bankruptcy was entered into prior to this day, the date on which the family home will be returned (if not sold) is the 29th of July 2016.
There is no requirement for any legal document to allow the bankrupt to take the property back – other than a Certificate from the Official Assignee in Bankruptcy.
Irish Law had already provided that the sale of the bankrupt’s interest in the family home could not take place without the approval of the Court. This “use it or lose it” provision has now added another layer to the protection of the family home.
If the home is worth less than you owe on the home loan (in negative equity) there should be no application for sale by the Assignee in Bankruptcy as there is nothing for him to realise.
In an application for the sale of the bankrupt’s interest ( ‘equity of redemption’) in the family home, the Court takes into account the interests of a spouse, partner, and children of the bankrupt.
In the event of an unsuccessful application to sell the family home, the Court has the discretion to give the family home back to the bankrupt without the need for further documents.
This re-vesting option can be waived by the bankrupt by written agreement with the official assignee and can also be overridden by the Court. The court also has the discretion to extend the period (three years) after which the property automatically re-vests in the bankrupt.
Podcast: The Family Home After Bankruptcy
What about the Bank?
As a word of caution, it is important to bear in mind that the Lender has an important say when dealing with a family home.
Can the bank take my family home in bankruptcy?
Losing your family home in bankruptcy is not a certainty and may not even be likely depending on your circumstances. Bankruptcy does not equal definitely losing your family home.
If the family home is mortgaged, then in practice, the bank owns the family home until the mortgage is repaid. The bank may choose to keep the property outside of bankruptcy proceedings and enter into an arrangement with you which would allow you continue to live there, repay the mortgage during your bankruptcy period and be in a position after bankruptcy to reclaim full ownership of the home once all mortgage payments are made in the future.
What you own prior to bankruptcy is any value in the home above what is outstanding on the mortgage (this is called the property’s ‘equity’). So if the house is worth €200,000 and the amount owed on the mortgage is €100,000 then you own a positive equity to the value of €100,000.
In bankruptcy, this ‘equity’ is transferred over to the Official Assignee in Bankruptcy along with all your other assets and debts and you start fresh. This equity can be positive or negative as the value of the home may be less than what is outstanding on the mortgage.
Will the bank choose to sell the home?
Banks are commercial enterprises and are seeking to make a profit. As such, they are likely to choose an option that will yield the best profit for them.
If they will make more money by receiving payments from you over a period of time rather than a once-off lump sum in a sale of the property then they may well to choose that option.
Consider the scenario where the house is only worth €100,000 but the mortgage owed to the bank is €200,000. The bank may well choose to keep the property out of bankruptcy and seek to ‘do a deal’ with you whereby they would get more through regular repayments over a period of time than they would in a once-off sale.
Note: What you will be allowed to offer the bank in terms of repayments may be limited to what the Official Assignee will consider a reasonable living expense.
What will the Official Assignee allow you to pay for a mortgage?
The Official Assignee’s approach to this has been to allow for the fact that people in bankruptcy need a place to live and whether renting or paying a mortgage, this cost must be considered in calculating how much of their income they are allowed to keep for reasonable living expenses and how much of their income must go to the creditors.
What is reasonable for a mortgage repayment is often calculated by looking at what a typical rent would be for a house that meets the needs of the family concerned.
The bank wants more than the Official Assignee will allow me to pay. Can someone else pay my mortgage or part of it?
If you are fortunate enough to have a fairy godmother to swoop in and pay your mortgage then this is a real option. The mortgage will not be in default and so the bank will not want to sell and the official assignee cannot restrict another person from paying a mortgage on a property. It is a gift and not an income on your part.
Is any of this different because a ‘vulture fund’ now owns my debt?
You the debtor are in the same position but simply owe the money to someone else. However, these funds may be more inclined, having bought the loan at a discount, to do a deal.
What happens after bankruptcy?
On adjudication, the interest of the bankrupt in the family home is transferred to the Official Assignee. The ‘interest’ is interest in the equity of the home which is the difference in value between the amount of debt owed on the property and the market value of the property.
A vesting certificate is filed with the Property Registration Authority which registers the interest of the Official Assignee in the property.
Protections on your former interest in the Family Home
While this interest is now the property of the Official Assignee, there are some important restrictions on the Official Assignee’s power to deal with the property when it is a family home.
Firstly, Court approval has to be obtained by the Official Assignee before he sells this property. Secondly, if the spouse or civil partner of the bankrupt is not themselves declaring bankruptcy, then they may purchase the interest from the official assignee. If the property is in negative equity (and so the Official Assignee’s interest would be negative) usually a figure of €5,000 and legal costs is charged.
Another important protection is the automatic re-vestment of the interest back to the bankrupt party if the property cannot be sold by the Official Assignee within three years. We looked at that in more detail in our previous blog.
Protections in a Personal Insolvency Arrangement
In certain circumstances, bankruptcy may not be the best option for a person dealing with debt and so a Personal Insolvency Arrangement (PIA) may be an alternative. This option will apply specifically to mortgage holders and those with secured and unsecured debts of €20,000 to €3 million.
Of particular interest to this discussion is the fact that a Personal Insolvency Practitioner is obliged by law to keep the person in debt in the family home unless the practitioner considers it is not practical (s.104 of the Personal Insolvency Act 2012).
The Act itself sets out considerations the practitioner should consider including a balancing of the cost of remaining in the family home versus the actual needs of the individual and their family.
Accordingly, it is unlikely that a 10 bedroom mansion with a swimming pool would be considered appropriate whereas a modest family home that costs similar to any alternative option has a much better chance of being protected.
Lynch Solicitors can assist you to ensure that your family home is protected in bankruptcy proceedings. Call us on 052 6124344, complete the form below or email us: [email protected] to arrange an initial meeting or call.