Bankruptcy and Property Ownership

Due to recent changes in the law this content is currently being updated and should be read accordingly

When a person is made bankrupt by an order of the court the bankrupt’s assets vest in the trustee in bankruptcy who realises them in order to pay the debts owed to creditors. The trustee in bankruptcy is usually an Official Receiver or an insolvency practitioner who holds the assets on trust for creditors of the person made bankrupt.

A trustee has the power to sell the person’s property, such as house, to pay the debts due to secured and unsecured creditors. However, the trustee’s ownership and powers of disposal differ according to whether the property of the debtor is owned solely or jointly.

Sole Ownership

If a home is owned solely, the trustee automatically gains the legal and beneficial interest in the property upon the bankruptcy of the debtor. This transfer occurs automatically because sole ownership in law and in equity entails whole ownership of the property and does not effect any severance of interests.

Accordingly, a debtor who owns property solely and is made bankrupt cannot sell the property or claim any proceeds from the sale. To enforce this, a restriction is placed on the title of the property.

Following bankruptcy, the trustee is free to sell the property although the bankrupt may be able to delay any sale for up to a year if there is a spouse or if there are children living there.

Joint Ownership

If the property is owned jointly, for example by the debtor and debtor’s spouse, the legal title registered at the Land Registry is held by both joint owners. This is separate to the beneficial title which is held on trust for the beneficiaries who may or may not be the same people as the legal owners.

Upon the bankruptcy of a joint owner, the trustee gains only a beneficial interest in that owner’s beneficial share of the property and not the legal interest. This is because a trustee in bankruptcy cannot become landlord in respect of the legal title - the legal title of jointly owned property is not severable. However, the beneficial interest in the property can be severed and divided as a result of a co-owner’s bankruptcy. As the legal title does not automatically vest in the trustee, a Form J restriction is registered in order that the trustee is notified of any dealing in the property.

A trustee cannot usually sell the property without the consent of the joint owners or a court order. Upon any sale, the trustee can recover money relating to the bankrupt’s share in the beneficial interest to repay creditors. The rest of the proceeds belong to the co-owner.

Conclusion

Bankruptcy can be complex if property forms part of the bankrupt’s assets, particularly if there are is a mortgage or co-ownership involved, it is essential that all parties to the proceedings seek the advice of an experienced solicitor, contact c.dunbar@osmondandosmond.co.uk or d.cockle@osmondandosmond.co.uk or by telephone on 0207 583 3434.