What happens if a joint owner becomes bankrupt?
(Last Updated: 18/11/2024)
20/02/2023
218
9 min read
Joint ownership of property can be disastrous if any of the joint owners are made bankrupt especially as it is most commonly the family home that is required to pay off the bankrupt owner's creditors. Without a formal written agreement in place, the Trustees in Bankruptcy, appointed to manage the bankrupt person's affairs, will assume the property is shared 50:50 (equally between all the owners), when the reality might be different.
For the owners who aren't being made bankrupt, your share of the property isn't at risk and you aren't liable for the debts of the bankrupt party. Not unless you are equally as party to the debt such as a mortgage. The issue that arises through the equal share assumption is that the facts maybe that you own more of the beneficial interest. To prove this you'd need written evidence such as a Deed of Trust or holding the title as tenants in common in unequal shares as stated on the TR1 on purchase/transfer. You could even own more of the property through your contributions toward the deposit, mortgage repayments and repairs and renovations.
Protecting your rightful share might involve a lengthy - and expensive - legal argument. However, you can get a Deed of Trust when you buy a property with someone else which ensures that if any joint owner becomes bankrupt, the Trustees in Bankruptcy can only access that bankrupt person's share. It is common to draft a deed after the purchase of the property to reflect your contributions towards it using a floating Deed of Trust.
You may be tempted to gift your property away to reduce your assets and avoid losing them, however these transactions could be reversed within the last 5 years to a third party from the date of bankruptcy or an unlimited time if you are defrauding your creditors. Whilst during an undervalue transfer you might get Insolvency Indemnity Insurance, you may also be required to give a Statutory Declaration confirming you are solvent; something that if you do and are lying has criminal consequences and fines.
What if one of the joint owners becomes bankrupt?
In cases where you have a joint owner bankrupt, the Trustees in Bankruptcy will seek that person's share of the house to contribute to paying off their debts. If the property was purchased tenants in common the Trustees in Bankruptcy will assume the share of the property is equal between the joint owners unless they have a legal agreement stating otherwise. This can be concerning if you invested more money into the property and don't having anything stating this.
Most purchases between friends, family or couples are held as tenants in common, whereas married couples normally buy as joint tenant (a joint tenant always owns the property equally together).
My husband is going bankrupt will it affect me?
Whilst as a spouse you aren't liable for your husband's debts, here's how it could affect you:
- Whilst your credit rating won't be affected like your husbands, you may find obtaining credit hard to get as your home will be associated to your bankrupt husband.
- Family home - If joint tenants then the Trustee files a Form J, severs the Joint Tenancy and the assumption is you share the property beneficial interest equally. You'll have to argue if you feel you have a greater share. You'll have 12 months to either buy out your husband's share or sell to release the equity. You husband's share goes to the Trustees to pay off his debts.
- Family home - If tenants in common then the Trustee still files a Form J however you'll need to prove if you have a different share than 50:50 via a Deed of Trust or through a Resulting or constructive trust where you spent more money.
If your husband was the main earner then him being made bankrupt is likely to mean you won't be able to pay your mortgage. You should speak to your mortgage lender and see what advice/help they can offer. If you don't have a mortgage, you'll still need to finance buying your husband's share out of the property something very difficult to do without a large enough income.
Will you lose your home if you have a joint owner bankrupt?
The official receiver or the trustee (if an insolvency practitioner has been appointed in place of the official receiver) may have to sell your home to help pay a bankrupt owner's debt.
Can I transfer my equity before I'm made bankrupt?
If you transfer your property to your spouse prior to bankruptcy proceedings being issued then these may be able to be recovered by the Trustee as a transaction at undervalue (two-year time limit) or as a transaction defrauding creditors (no time limit). Read more - Transfer at Undervalue Insolvency Act Rules
Can you sell the property without the Trustee knowing?
No. After bankruptcy, the Trustee registers a Form J restriction at the Land Registry against the title of the jointly owned property. It is a record of the Trustee's beneficial interest in the property and it means the Land Registry will notify the Trustee of any dealings in connection with the joint owners’ property. A Form J restriction is different from a charge, which relates to a claim for a specific amount of money.
The legal interest in the property does not transfer to the trustee, so you can still sell the property, but the trustee must be paid the value of the bankrupt’s beneficial interest from the sale proceeds.
The Form J restriction will only be removed at the request of the Trustee once they have been paid the bankrupt party’s beneficial interest in the property.
If you have a restriction you no longer need or want, read our article: How to Remove Restriction on Property, next.
How long do you get before an order for sale?
You normally have 12 months from the date of the bankruptcy to come to some arrangement for releasing the bankrupt owner's equity in the property. Failing to come to an agreement could lead to an application for possession or sale with the end goal of selling the property.
The Trustees have a time limit of 3 years from the date of bankruptcy to start proceedings for an order for possession or to sell. If the application is outside of this time limit then the property is outside of the estate of the bankrupt owner.
What's the process to buy the bankrupt owner's share?
The owners can buy the share of a the bankrupt owner and can do this by contacting the Trustee or the official receiver, whoever is applicable. You can access a property conveyancing scheme run by The Insolvency Service if the bankrupt owner's beneficial interest has a value of more than £1000.
Under this scheme, the beneficial interest can be transferred back to the bankrupt owner, their wife, friend, family member or the non bankrupt owners; however they will need to pay for the following:
- a conveyancing solicitor to act for them;
- £211 (as at Oct 2014) to cover the official receiver's legal costs, to be paid in advance, which includes an allowance for expenses that the transaction may incur. If the allowance is not fully used, they will receive a refund;
- the cost of an independent valuation unless they already have a recent one i.e. normally carried out within the last 3 months; and
- the agreed purchase price for the beneficial interest based on the valuation.
They will also have to give up-to-date details, in writing, of the amounts needed to pay off the mortgage and any other charges on the property.
If the joint owners cannot afford the costs of the scheme, they may still be able to take part in it at a later date, when they can pay for it. The Owners should contact the official receiver about this.
If, later, they approach the official receiver to buy the beneficial interest, and the property has increased in value, the purchase price is likely to have increased. If the home is mortgaged, the lender may have to agree to the sale - the conveyancing solicitor dealing with the transaction will be able to advise on this.
What is the Property Conveyancing Scheme?
The Property Conveyancing Scheme provides solicitors for you based on fixed fees for the transfer conveyancing. You can use your own solicitor however the cost is more than likely to be more. Speak to the trustee to find out more about how to instruct a solicitor through the Property Conveyancing Scheme.
Do joint owners have options if someone becomes bankrupt?
You can sell and share the sale proceeds as per the terms set down in their joint ownership agreement or they can buy the share of the bankrupt owner and pay the Trustee. If they do nothing, they may find themselves being forced to sell at a later stage so that the Trustee can get the bankrupt owner's share.
The best advice is to speak to the Trustee and work with them. Keep them updated with as much information as possible and try to see if the home can be kept by refinancing to buy out the bankrupt joint owner.
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
