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What happens to the family home in Bankruptcy?

What happens to the family home in Bankruptcy?

Secured Creditor 3 Options in Bankruptcy – First Schedule to Bankruptcy Act 1988

While it is true to say that the same levels of protections around the family home within a PIA do not exist in bankruptcy, it is not automatic that a bankrupt will lose their home.  The table below sets out  the options available to a secured lender in bankruptcy.

 Financial InstitutionChoice  Financial Institution and
Official Assignee Actions 
 Debtor Consequences
 1.Rely on security(and not claim in bankruptcy) 1.1 Positive Equity, Financial Institution sells propertyIf the mortgage is not being paid on terms acceptable to the financial institution, it can sell family home and can claim interest on the mortgage up to date of sale. Surplus of sale proceeds given to OA (assuming no judgement mortgagees –  who would have priority to OA)1.2 Positive Equity, OA sells property

Even if the mortgage is being paid, the OA nevertheless may sell family home, having obtained a Court order (under S 61(4) Bankruptcy Act) to realise equity in family home for creditors. In the first instance, he will always seek to sell to spouse.

 1.1 Positive Equity, Financial Institution sells propertyHome lost.  The surplus from the sale proceeds may generate funds that the bankrupt can use to do a composition with creditors, discharging the bankruptcy.  If no composition is achieved, the OA will allow rent payments for accommodation as part of I.S.I. Reasonable Living Expenses (RLEs) allowance, before assessing for Income Payment Order.1.2 Positive Equity, OA sells property

As above.

 1.3 Negative Equity, Financial Institution does not sell propertyMortgage lender ignores technical default of bankruptcy, once mortgage being paid on terms acceptable to financial institution.1.4 Negative Equity, OA does not sell property

If no equity, the OA will not sell home and interest continues to vest in him, post discharge. In first instance, OA will always however seek to sell his half interest to spouse.

 1.3 Negative Equity, Financial Institution does not sell propertyOnce mortgage being paid on terms acceptable to financial institution, it will not seek to sell family home.1.4 Negative Equity, OA does not sell property

Assuming agreed mortgage payments are reasonable for family size and OA allows as RLE – he pays mortgage and retains home.

Spouse jointly & severally liable for full mortgage.

 2. Abandon security (and claim full debt in bankruptcy)  Very rarely chosen – only where prior mortgages take full securityUnsecured claim for full debt made in bankruptcy.  It depends on action of prior mortgagees whether bankrupt retains homeSpouse jointly & severally liable for full mortgage.
 3. Realise or value security (and claim for shortfall in bankruptcy)  3.1 Financial Institution realises security and claims shortfall in bankruptcy as an unsecured claimAs financial institution is claiming in bankruptcy it is subject to S 75(2) Bankruptcy Act, which states that it can only claim mortgage interest up to date of adjudication.  3.1 Financial Institution realises security and claims shortfall in bankruptcy as an unsecured claimHome lost.  Shortfall after dividend payment (if any) is written off against bankrupt.Spouse jointly and severally liable for full mortgage.

OA will allow rent payments for accommodation as part of RLEs.

 3.2 Financial Institution values security and claims shortfall in bankruptcy as an unsecured claimRare as it limits security to amount assessed at time. Creditors tend to prefer 1.3 option, allowing mortgage be paid and security appreciates.  3.2 Financial Institution values security and claims shortfall in bankruptcy as an unsecured claimKeep home, once mortgage being paid and allowed by OASpouse jointly & severally liable for full mortgage.

 

APPENDIX 2

SURVEY OF FAMILY HOMES IN BANKRUPTCY

Summary

In April 2014, the Bankruptcy Division of the ISI carried out a survey of family homes in bankruptcy over the last 4 years. The results are split between the current year 2014 and years 2011–2013.

The key findings of the survey are that:

  • The majority of bankrupts have remained in their family homes.
  • Of 73 bankruptcies so far in 2014, 33 persons are renting (14 of whom were in homes that have been voluntarily surrendered), leaving 40 in their family homes now, though of these 4 have had possession orders made against them which have not yet been enforced.
  • Of 121 bankruptcies between 2011– 2013 (deducting 5 that were annulled); 55 persons are currently renting (10 of whom were in homes that have been voluntarily surrendered and 11 of whose homes were possessed by order) leaving 66 now in their family homes.  In relation to 16 of these remaining cases where persons are still in their family homes, there are family law proceedings in being or proceedings by the Official Assignee either issued, or soon to be issued.

 2011 to 2013 

 2014

 Number bankrupted 

 126

 73

 Family homes  voluntarily surrendered

 10

 14

 Family homes  possessed by order

 11

 0

 Possession Order granted (Still in possession)

 12

 4

 OA seeks order for sale    (S 61(4))

 3

 0

 Bankruptcy Annulled

 5

 0

 Mortgage being paid (not in default)

 25

 16

 Mortgage not being paid (in default)

 10

16

 No mortgage

 10

  0

 No Family home – renting

 34

 19

 Total number of properties involved 

 120 

 69

 

Note: number of properties will be less than no. of bankrupts due to couples going bankrupt.