What Happens If A Joint Owner Of Property Becomes Bankrupt?
Bankruptcy can be a complex and daunting process, especially when it involves jointly owned property, such as a family home.
When a joint owner of property becomes bankrupt, their assets, including any property they own, are transferred to a trustee in bankruptcy who will manage and sell the assets to pay off their debts.
If the family home is owned by the bankrupt party, the trustee in bankruptcy will have a legal interest in the property and may have the power to sell the property to pay off the debts.
However, if the family home is held in joint tenancy with a non-bankrupt individual the situation can become ever more complicated.
In this article we will explore the options available to joint owners of a family home in bankruptcy and discuss how selling the property before bankruptcy can help improve the debt situation of the joint owners.
What Happens To Your Home When You Go Bankrupt?
If you own your property outright when you go bankrupt in the UK, you may be at risk of having to sell the property to repay your debts.
If you have a mortgage on the property, your mortgage lender has the right to repossess your property if you default on your payments.
If you are in arrears on your mortgage payments, the bankruptcy may allow you time to negotiate with your provider and come to an arrangement to repay your debt over time.
Alternatively, your bankruptcy trustee may negotiate with your provider to come up with a repayment plan that allows you to keep your home.
Without a formal agreement in place, the Bankruptcy Trustee’s will assume that the property has been split equally between all owners – which can be unfair if one party has invested more or less than the other.
How Long Does Declaring Yourself Bankrupt Last?
In the UK, declaring yourself bankrupt will last for 12 months – your finances will be managed by a licensed insolvency practitioner or the Official Receiver who will sell your assets to repay your debts.
The impact of bankruptcy can last longer than the initial 12 months as bankruptcy will remain on your credit card record for six years from the date of your bankruptcy order; which will make it harder for you to obtain credit, loans or mortgages during this time.
Before declaring bankruptcy, it's important that you seek professional advice from a licensed insolvency practitioner or financial advisor.
What If One Joint Owner Becomes Bankrupt?
If you or your partner are made bankrupt then you’ll no longer be able liable for any debts that you have with them. However, they will still be liable for the full amount.
If you have shared ownership or joint ownership of a property, the bankruptcy may affect your co-owners share in the property. But, the legal title of a jointly owned property will remain invested in both owners.
The non-bankrupt owner will have the option to buy out your share in the property or sell the property and split the proceeds.
Can Jointly Owned Property Be Seized?
If a jointly owned property has been used as a security debt and one or more of the owners becomes bankrupt, there is a possibility that the property could be seized to repay the debt.
In the UK, there are rules governing the seizure of jointly owned property in bankruptcy can be complex but the ownership structure, nature of the debt and the individual circumstances of the owner will all be taken into account.
It’s worth noting that joint ownership can provide some protection against property seizure. If the jointly owned property is held as tenants in common, then each owner’s share of the property can be treated separately and only the bankrupt owner’s share is at risk.
But, if the property is held as joint tenants, then the property is owned jointly which is far more difficult to separate ownership shares.
Can You Keep Your House If You File For Bankruptcy?
Under UK bankruptcy law, your home may be at risk if you have equity in the property that exceeds the amount you can afford to repay your debts.
If you are unable to pay your debts and your bankruptcy trustee decides to sell your home, you may be able to keep a certain amount of the proceeds from the sale to help you find alternative accommodation.
However, if you are able to pay off your debts without accessing the equity in the property then you will be able to keep your house.
Will You Lose Your House If Your Partner Goes Bankrupt?
Even if your partner’s name isn’t on the mortgage, you may lose your home if your partner has a beneficial interest in it.
Beneficial interest refers to the ownership or right to use a property, even if the legal title to the property is held by someone else.
A beneficial owner has an interest in the property that allows them to enjoy the benefits of ownership, such as receiving rental income or using the property as their own.
Your creditors may pursue you for payment of the full amount of any joint debts you have with your bankrupt partner. When you take out a joint credit agreement, you will both agree to be responsible for the total amount of debt — also known as Joint and several liability.
How Do You Check If You Are Responsible For Paying The Debt?
You may be able to dispute your liability in the case that your partner took out joint debts without your knowledge if you are able to show you didn’t sign the credit agreement.
Can HMRC Take Your House In Joint Names?
HMRC can place a charging order on any property owned jointly or solely by a debtor unless the debt relates to a business and the property isn’t a business asset.
If your property is your only asset you own that can be used to clear the debt, it’s more likely that HMRC will ask you to release equity from the property or place a charge on the property so the debt would need to be repaid if it was sold or if you decided to remortgage.
But, it’s highly unlikely that a personal HMRC tax debt would be large enough to warrant the options above. It’s far more likely that you will owe a high tax debt due to a business with a high turnover — but your home is not a limited company asset.
Can You Sell The Property Without The Trustee Knowing?
After you declare bankruptcy, the Trustee will register a Form J restriction via the Land Registry against the title of the jointly owned property.
This is a record of the Trustee’s beneficial interest and means the Land Registry will notify the Trustee of any dealings in connection with the joint owners’ property.
A Form J is used to claim an exemption for certain personal property that is considered essential for the bankrupt person’s daily life and work. Its purpose is to protect certain essential items from being sold to repay the bankrupt person’s debts.
The trustee is not transferred the legal interest in the property so you are still able to 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 be removed at the request of the Trustee once they have received payment for the bankrupt party’s beneficial interest.
How Do You Buy The Bankrupt Owner’s Share?
If your property co-owner has been declared bankrupt and their share of the property is to be sold to repay their debts, it may be possible to buy their share.
You will be able to negotiate with the Official Receiver or the bankrupt person’s trustee to purchase their share of the property, which will involve making an offer for the share based on an independent valuation of the property taking into account the value of the share and any outstanding debts.
You will be able to access a property conveyancing scheme from The Insolvency Service if the bankrupt owner’s beneficial interest has a value of more than £1000.
Under the scheme, the beneficial interest will be transferred to the bankrupt owner, immediate family members or non-bankrupt owners, but they will need to instruct a solicitor or conveyancer and pay for the following:
£211 to cover the Official Receiver’s legal fees – this is paid in advance and includes an allowance for expenses that the transaction may incur. They will receive a refund if the allowance isn’t fully used.
An Independent valuation.
The agreed purchase price for beneficial interest based on the valuation.
The non-bankrupt parties will need to provide up-to-date details in writing of the quantities needed to pay off the mortgage and any other charges on the property.
If they cannot afford the costs of the scheme, they may still be able to take part in the process at a later date when they can pay for it.
Alternatively, if the non-bankrupt trustees cannot afford the scheme they may be able to bid for the share of the property at a public auction, which is sometimes used to sell off bankrupt people’s assets.
Does The Bankrupt Owner Pay Capital Gains Tax On The Sale?
When a bankrupt owner’s share of a property is sold to repay a debt, any Capital Gains Tax (CGT) liability will depend on if their share of the property is sold at a loss or gain.
If the property is sold at a loss then there will be no CGT liability, however, if the sale results in a gain, the tax implications will depend on whether the property is considered a business asset or personal asset.
If the property is a business asset, any gain from the sale will be subject to CGT. However, if the property is a personal asset and was the bankrupt person’s main residence, they may be able to claim certain reliefs or exemptions from CGT via Private Residence Relief (PRR).
Private Residence Relief exempts any gains made on the sale of the main residence from Capital Gains Tax.
What Options Are Available For Joint Owners Entering Bankruptcy?
If one or more joint owners of a property are considering bankruptcy then there are several steps they should take to protect their interests and assets:
Seek Professional Advice
Before making any decisions about bankruptcy, we would recommend seeking professional advice from a licensed insolvency practitioner or financial advisor to fully understand the potential tax implications and risks involved.
Consider Alternative Options
Bankruptcy may not be the only option for joint owners facing financial difficulties; Debt management plans, IVAs, or Debt Relief Orders (DROs) may be more appropriate depending on the level of debt and the joint owners’ ability to repay it.
Debt Management Plan (DMP)
A Debt Management Plan is a type of debt repayment program that can help individuals avoid bankruptcy by providing a more manageable way to pay their debts via reduced payments, improve credit score and allow flexibility.
Individual Voluntary Arrangement (IVA)
Individual Voluntary Arrangements involve creating a formal agreement between creditors to pay off debts over a set period, in turn allowing each joint owner to enter their own IVA agreement. This allows each joint owner to become responsible for paying their own share of the joint debt.
Joint Voluntary Arrangement (JVA)
Joint Voluntary Arrangements involve both joint owners entering into an agreement with creditors to pay off debts over a set period. The JVA is a legally binding agreement and both owners are jointly responsible for repaying the debt.
Debt Relief Orders (DROs)
A Debt Relief Orders is a form of insolvency that can help individuals escape bankruptcy and write off their debts if they meet a certain criteria. A DRO means you do not need to sell assets, and will be able to keep all possessions and property.
Review Property Ownership
The joint owners should review the ownership structure of their property to determine whether it is held as joint tenants or tenants in common. If the property is held as tenants in common, the beneficial interest in the property can be divided in a way that reflects the contributions of each joint owner.
This can protect the share of the non-bankrupt joint owner and may also help to reduce the amount of the bankrupt joint owner’s debt.
If both joint owners cannot agree on an IVA or JVA, they may consider filing for bankruptcy together. This option will enable them to deal with all their debts in one go. But, each joint owner will have to pay a fee to the Insolvency Service to go through the bankruptcy process.
Selling Before Bankruptcy
Selling your property before filing for bankruptcy can help improve your debt situation by reducing the amount of debt you owe and potentially avoid bankruptcy altogether.
This may be the most effective way to clear debts as bankruptcy will affect most areas of your life – from credit to employment, to family life and to being forced out of your home with nowhere to go.
By selling your property you can use the proceeds to pay off some or all of your debt, reducing your debt load and making it easier for you to manage your finances.
If you are able to sell your home and use the proceeds to pay off your debt, you may be able to avoid bankruptcy altogether. Bankruptcy should be seen as a last resort as it can have significant long-term consequences (6 years) for someone's credit score and financial future.
As joint owners, if you wait until you file for bankruptcy to sell your property, the trustee may be able to seize the property and use the proceeds to pay off the joint owners’ debts.
By selling the property before bankruptcy, the joint owners can protect their interest in the property and prevent it from being sold.
We can help you sell your property fast and for free, allowing you to pay off all or part of the debt-owing owners share of the property, without the need to file for bankruptcy.
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