The past few years have seen a rise in personal bankruptcy in the UK as the levels of consumer debt increase and individuals struggle to pay their bills. With the looming threat of unpayable debt it is foreseeable that homes may be at risk.
It is an unfortunate reality that single parents together with separated and divorced people in the UK are statistically the most likely to fall into serious debt. This blog considers the position where one party to a divorce is declared bankrupt and the impact this has on the right of the other spouse in the family home.
When someone becomes bankrupt their property automatically vests in (i.e. passes into the control of) the trustee in bankruptcy. This includes any interest in the family home. However, the bankrupt can retain sufficient assets to meet the basic needs of himself and his family.
When it comes to the family home, the law has to balance two conflicting interests: those of the trustee and creditors and those of the bankrupt as well as his family.
The most frequently occurring situations are:
1.Where the bankrupt remains in the family home and
2. Where the bankrupt is separated but his family remain in the home.
Where the home is owned and occupied exclusively by the bankrupt, there may be an immediate sale for the benefit of the creditors. However, if there are others living in the home, for example a spouse and/or dependent children, then the Trustees have to make an application to the court for an order to sell the property. Generally speaking if someone has acquired occupation rights, they are entitled not to be evicted without a court order. Where the Trustee in Bankruptcy applies to the court for an order for sale or possession of the property, the court must have regard to the following:
Where the spouse/civil partner is living in the home
- the interests of creditors
- the conduct of the spouse so far as it contributed to the bankruptcy
- the needs and financial means of the spouse
- the needs of any children
- all circumstances surrounding the case
- but not the needs of the bankrupt themselves (unless there are exceptional circumstances)
It is important to note that the non-bankrupt spouse’s rights of occupation which are registered as a charge against the property subsist notwithstanding the bankruptcy.
Where a minor child is living in the home
- the interests of creditors
- the financial resources of the bankrupt
- the needs of the children
- all circumstances surrounding the case
- but not the needs of the bankrupt (unless there are exceptional circumstances)
Where the bankrupt and their spouse are getting divorced then the trustee in bankruptcy may be joined to financial proceedings where a final order has not yet been made. In those circumstances the court will require that any application in relation to the family home issued by the trustee be heard at the same time as the application for financial relief. The trustee may therefore become quite involved in the financial proceedings and may ask for any financial disclosure provided by the bankrupt. This may reveal assets and income previously undisclosed to the trustee which might then form part of the pool of the bankrupt’s property available to creditors.
If final order has been made in relation to the property prior to the commencement of bankruptcy proceedings, the order cannot be challenged by a trustee in bankruptcy.
It may be the case that both parties are not married but are cohabiting. A cohabitant living with the bankrupt, other than a child, who has no legal or beneficial interest in the property, generally has no home rights unless an occupation order is in force which has the effect of delaying eviction for a certain period of time. If there is no occupation order, then it is likely that the trustee will be able to evict the cohabitant without a court order. Even if the cohabitant can say they are a tenant or licensee of the bankrupt, this will not necessarily offer them protection against eviction.
At the end of the bankruptcy, many debts cease to exist with some exceptions such as arrears of spousal maintenance and child support for which the bankrupt remains liable.
Top Tips
- Check whether the property is held in joint names or in one party’s sole name. If the party is held in the bankrupt’s sole name, then the spouse may be able to establish a beneficial interest in the property that affords them rights as an occupier. For example, have you contributed towards a mortgage?
- If you are the non-bankrupt spouse, register your beneficial interest in the family home as soon as possible with the Land Registry.
This is a complex area and specialist advice should be sought if you believe you may be affected, directly or indirectly, by bankruptcy.
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