What happens the family home in a bankruptcy?
Irish insolvency laws are about to undergo a radical change, writes Steve Thatcher, but what do the new regulations mean for those who want to go bankrupt but keep their houses?
With new insolvency laws pending,for anyone facing bankruptcy either here or in the UK, often the greatest concern is the family home. Unfortunately, in either an Irish or a British bankruptcy it can be difficult to retain control of the family home. But it depends on personal circumstances, such as the living arrangements of the family and whether both or only one of the mortgage holders declares bankruptcy.
Bankruptcy is a settlement of the debts of someone who is unable to repay them. The purpose of the bankruptcy is to distribute the assets fairly among the creditors and provide protection from legal action from these creditors.
Bankruptcy in Ireland
If you go bankrupt in Ireland all of your assets will be controlled by an Official Assignee (OA) who is appointed by the High Court to oversee your bankruptcy. The assets include the family home. However, the OA must still apply to Court for approval to sell a family home. Following its establishment, the new Insolvency Service of Ireland (ISI) will be responsible for assigning OAs to a bankruptcy.
When this permission is sought, the Court will balance the interests of creditors against the interests of the family and may decide to postpone the sale of the home once it has considered the living arrangements of the applicant and their dependents.
This means that where a sole mortgage holder goes bankrupt, if they have a partner/spouse or dependents living in the home then the Court will take their living arrangements and wellbeing into consideration. If the Court believes that circumstances dictate that a sale should be postponed it can do so. This has sometimes happened, for example, where children are sitting Leaving Cert exams. However, in many cases this postponement has only been temporary, and where there is value in the property that can be sold for creditors, an OA will generally only postpone taking possession for a maximum of one year.
If the property is jointly owned (for example, with a spouse or partner), the bankruptcy will mean that the joint ownership is then split between the Official Assignee and the remaining mortgage holder, who is then solely liable to cover the full amount of the mortgage (even though a 50 per cent share of the property remains with the OA).
However, as in a lot of cases currently in Ireland, if the property is in negative equity and there is little chance of regaining value in the short-term, then the OA would generally offer his share of the property to the remaining mortgage holder for a small sum, plus his conveyancing costs (it also reduces the costs of administering the bankruptcy’s assets for the OA /Court). This would be a desirable outcome for the remaining mortgage holder as they are liable for the full cost of the mortgage anyway.
Bankruptcy in Britain
I frequently see situations where a relationship breaks down and one person relocates to the UK for work purposes and then goes bankrupt there, whilst the former partner and children remain in the Irish home. However, if the property has been bought with a joint mortgage and only one mortgage holder goes bankrupt, even if it is in Britain, then the remaining mortgage holder becomes solely liable for the continuing mortgage payments on the property in Ireland.
The bankrupt’s share of the property then vests in the British equivalent to an Irish OA called an Official Receiver (OR), who is appointed by the Insolvency Service of the UK, but, once again, there may be the opportunity to buy the bankrupt’s share of the property for a small fee.
If both mortgage holders move to Britain then their Centre of Main Interest (COMI) will need to be established there before they can qualify for bankruptcy. The Irish property then ceases to be the family’s primary home by virtue of them qualifying as residents in Britain for the purposes of the bankruptcy, so it would not be possible for them to also argue that they should retain the Irish property.
Once bankruptcy is applied, all the properties they have in their names will vest in the OR. The job of the OR is to sell the properties to get as much value as possible for all creditors. In reality, the properties will probably be in negative equity and there will be little benefit from a sale. The OR then has some options; he can place a charge on the property that would have to be repaid in the event of a sale, or he can hand the property back to the bank.
A family’s financial problems can often impact most on the children. Unfortunately they have no claim to a share of a property when one or both of their parents goes bankrupt either in Ireland or Britain. Though, as outlined above, if the children are living in a property that is subject of bankruptcy proceedings this can sometimes be looked on sympathetically by a judge when deciding the outcome ownership or transfer of possession of a property.
Steve Thatcher is a practising solicitor and insolvency specialist