What Happens to the Family Home When Someone Is Made Bankrupt?

A trustee’s approach will depend on how the bankrupt’s family home is owned and whether it is registered at the Land Registry. 

On appointment, the trustee will take steps to protect their interest in the bankrupt’s family home and consider the options for realising that interest. 

To protect their interest in registered property, the trustee should:

• Check the registered title to the bankrupt’s family home.
• Notify interested parties of the trustee’s interest. The relevant interested parties are:
  • The bankrupt.
  • The bankrupt’s spouse or civil partner if they were living in the property as their sole or principal residence at the date of the bankruptcy order.
  • Any former spouse or former civil partner of the bankrupt if they were living in the property as their sole or principal residence at the date of the bankruptcy order.
  • Any lender or charge holder because if the lender or charge holder enforces their security over the property, they are aware of the trustee’s interest in any surplus distribution of funds.
• Ensure that a bankruptcy restriction is entered against the title at the Land Registry.

The trustee should also make enquiries of any lenders who have security over the property, including whether there is any ongoing or imminent action to realise that security. 

The trustee should also find out how much the lenders are owed because this will have an impact on the amount of equity available in the property. 

If the trustee believes that the bankrupt has an interest in unregistered property, then the trustee will check that the bankruptcy restriction has been registered on the Land Charges Register. 

The trustee should also ask the joint owner, lender and other charge holders to note the trustee’s interest.  If the property is solely owned by the bankrupt and there is no mortgage, the trustee must locate and safeguard the deeds. 

However, this largely depends on the success of the trustee’s initial enquiries because the bankrupt may not always disclose the existence of the unregistered property. 

The trustee may also apply for a caution against first registration or apply for first registration where appropriate. 

Finally, as is the case with registered property, the trustee must notify all interested parties of their interest in the unregistered property. 

The trustee must take steps to deal with their interest in the bankrupt’s family home within three years of either the bankruptcy order or the date the trustee becomes aware of the property if the bankrupt did not inform the trustee of the property within three months of the bankruptcy order. 

The trustee has several options when dealing with the family home including:

• Realising the bankrupt’s interest in the family home (i.e. selling it to somebody else, usually a joint owner or family member);
• Applying for an order for possession and sale; or
• Applying for a charging order covering the value of the trustee’s interest.

If the trustee fails to take any of the above steps, the trustee's interest in the family home falls out of the bankruptcy estate and revests in the bankrupt. 

This is known as the “use it or lose it” rule. 

The three-year period can be extended by a court order but only in exceptional circumstances. 

A practical way for the trustee to seek further time, for example, where they are waiting for a specific payment which may mean they do not need to realise their interest in the bankrupt’s home, is to apply for an order for possession and sale and then agree a consent order or suspended order extending the time beyond the three-year period, subject to the court’s approval. 

The three-year rule does not apply to the sole or principal residence of a cohabitee or ex-cohabitee in which the bankrupt has interest.  The three-year rule only applies to property that is the sole or principal residence of either:

• The bankrupt.
• The bankrupt’s spouse or civil partner.
• The bankrupt’s former spouse or civil partner.

Where the bankrupt had an interest in another type of property that has vested in the trustee, the trustee’s interest remains indefinitely, until dealt with during the administration of the bankrupt’s estate. 

Where the property has minimal value, or there is negative equity in the property, and it is likely that this will be the case three years after the bankruptcy order is made, the trustee may revest their interest to the bankrupt early. 

Where the trustee considers that the property has revested in the bankrupt under the three-year rule, the trustee must deliver notice as soon as reasonably practicable to the bankrupt and any spouse or civil partner or former spouse or civil partner living in the property at the time of the bankruptcy order. 

Normally, this notice is delivered as soon as possible after the trustee’s appointment.  However, the trustee only needs to give the recipients 14 days’ notice of the automatic revesting of the property in the bankrupt.

The procedure differs depending on whether the family home is jointly and solely owned. 

For jointly owned properties, if the non-bankrupt co-owning spouse or partner cannot, or will not, cooperate in a voluntary sale of the property, the trustee will apply to the court for an order for sale under section 14 of the Trusts of Land and Appointment of Trustees Act 1996. 

The court will make whatever order it thinks is just and reasonable having regard to the factors listed in section 335A(2) of IA 1986 which are:

• The interests of the bankrupt’s creditors;
• The conduct of the spouse, civil partner, former spouse or former civil partner so far as contributing to the bankruptcy;
• The needs and financial resources of the spouse, civil partner, former spouse or former civil partner;
• The needs of any children; and
• All the circumstances of the case other than the needs of the bankrupt.

Where the trustee applies for an order for possession and sale after the first anniversary of their appointment, the court shall assume that the interests of the bankruptcy creditors outweigh all other considerations unless there are exceptional circumstances.

If the property is in the bankrupt’s sole name, the legal title to and beneficial interest in the property automatically vest in the trustee on their appointment. 

This gives the trustee the power to sell the property without a court order.  However, the trustee will not automatically obtain possession if, for example, the bankrupt’s spouse, partner or children living in the house have rights of occupation such as those protected under section 33 of the Family Law Act 1996. 

Therefore, in these circumstances, the trustee is still likely to apply to the court for an order for possession and sale.  Any third parties who have a right to occupy the property may cause delay to the trustee in obtaining an order for possession and sale.