News & Insights

Can you stay in your home after bankruptcy

Robert Woodhouse, Senior Associate in the Dispute Resolution team, takes a closer look at the law of bankruptcy, focusing on the major asset in most bankruptcies, the family home. 

When someone is declared bankrupt and that person owns, or jointly owns, his or her home, it is usually the most valuable asset in the bankrupt’s estate. The trustee in bankruptcy has a duty to deal with the property for the benefit of the bankruptcy creditors. Unless some friend or family member is in a position to buy the property from the trustee in bankruptcy, the unfortunate consequence is usually that the trustee in bankruptcy will seek to obtain possession of and then sell the property.

According to Section 335A of the Insolvency Act 1986, where the trustee in bankruptcy applies to the court for possession of a property, the court can make such order as it thinks just and reasonable having considered the conduct of the bankrupt spouse or former spouse, the needs of any children aged under 18 at the home and “all the circumstances of the case other than the bankrupt’s own needs”. Where the trustee in bankruptcy applies for possession after the first anniversary of the bankruptcy, the court presumes that unless there are “exceptional circumstances” the interests of the bankruptcy creditors outweigh all other considerations.

So what are “exceptional circumstances”?

Cases where a trustee in bankruptcy’s application has been adjourned or even dismissed are quite rare, but in the past the courts have found exceptional circumstances to exist where for example there is a sudden grave and unforeseen illness in the family or someone in the family living at the home suffers from paranoid schizophrenia.

In a recent case the bankrupt’s adult child lived at the bankrupt’s home. She suffered from global development delay, dyspraxia and obsessive compulsive disorder; she had a mental age of 8 or 9 and was incapable of living on her own.

The court accepted that these were indeed exceptional circumstances but only to the extent that the sale should be postponed for one year. That was sufficient in the court’s opinion to allow alternative accommodation to be found. It took the view that although the bankrupt and his family were unable to buy another property given their resources, the bankrupt’s spouse’s financial circumstances would still allow the family to be accommodated in private rented accommodation. An indefinite postponement of the sale was not consistent with the purpose of the bankruptcy legislation at the heart of which was the passing of the bankrupt’s property to his trustee in bankruptcy, so as to distribute the net proceeds amongst the unsecured creditors.

In all save the most truly exceptional circumstances, the underlying purpose of the bankruptcy code required realisation within a much shorter timeframe, normally measured in months, not years or indefinite periods.

This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by Field Seymour Parkes LLP.