Does being made bankrupt always lead to losing your home?

OTHER than writing about the current Russian incursion into Ukraine, media attention is focused upon terms such as “rising inflation”, “cost of living crisis”, “eat or heat”, “interest rate rises”, and “fuel poverty”. It may not take

many more months until we start reading about “bankruptcy” and “house repossession”.

After all, if personal debts become as unmanageable as the stress created by the inability to pay them, the bankruptcy option often provides a release from creditor pressure and an opportunity to reorganise one’s financial circumstances such that a more balanced position can be established. Whilst bankruptcy will

eliminate virtually all personal debts……good news…..what about the ability to keep the house? If the house is rented then, as long as rent continues to be paid at

the agreed amount, the accommodation position will not change. However, 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 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 £340,000, the trustee is unlikely to be interested in the house and indeed, may abandon his interest at an early stage. The State official dealing with sequestrations, the accountant in bankruptcy “aib”, permits abandonment when the view is taken that the negative equity position is unlikely to reverse in the next few years. Another option is for

the trustee to accept an agreed sum ( £500 is the current aib figure ) from the bankrupt of in exchange for removing

his interest in the house where it can be shown that minimal net equity exists.

Another matter to consider is the secured creditor’s attitude because, even if the

trustee does not wish to pursue the house, the secured creditor may seek to repossess if the mortgage is not serviced on a regular basis.

With regard to the family home then, as one might anticipate, the Act has comment to make. 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 authority from the sheriff

court. 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 any easier if, for example, title is in the sole name of the bankrupt. When a trustee commences legal action, the Act 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 debtor’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.

It is fairly common practice for the trustee to negotiate with the bankrupt about

establishing the net equity position and how best to deal with it. Sometimes a bankrupt is able to increase the mortgage in order to release the sum required. Frequently, the spouse will provide the cash required, and it is not unusual for either a friend or family member to provide the necessary sum of money : normally on the basis that the bankrupt will seek to

repay the lender at some point in the future.

It is fair to say that every bankrupt who owns a house does not lose the house. A trustee 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. Although the whole issue can become somewhat stressful and often takes a year or so to resolve, it is by no means certain that

a bankrupt will always lose the house.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those

of the firm in general.