Bankruptcy and Co-ownership of Property
Due to recent changes in the law this content is currently being updated and should be read accordingly
When the co-owner of a property faces bankruptcy, how that property is held can have a significant effect on the outcome for the other party. Most important is to distinguish whether the property is held as tenants in common where the interest is held in separate shares, or beneficial joint tenants where the interest is held in equal undivided shares.
Tenants in Common
As a starting point, co-owners should check to see whether a declaration of trust has been executed or if a transfer document was filed with Land Registry that clearly sets out how the property is held or each owner's separate contribution to the purchase price. If neither exists, the solicitor that acted on the purchase should be consulted to see if a tenancy in common was the intention upon purchase.
Joint Tenants
In most cases property is held as joint tenants on a 50:50 but undivided basis and the equity of the bankrupt will pass from the bankrupt to the trustee in bankruptcy. Generally the trustee will seek to make an immediate claim to the percentage owned by the bankrupt by registering a restriction on the title of the property.
If the bankrupt is a joint tenant, the legal status of bankruptcy will automatically sever the beneficial joint tenancy. This means that the trustee will acquire the beneficial interest of the bankrupt owner on a divided basis under a trust of land but not the legal title. Therefore, any transfer will still require the signature of both co-owners.
Assessing the Level of Equity Ownership in Bankruptcy
Even though the trustee is entitled to the bankrupt's portion of the property, there are means to potentially limit their entitlement. If a declaration of trust does exist or it can be shown that the non-bankrupt owner contributed more to the purchase price, then they may be able to claim the difference out of the bankrupt's equity.
Another consideration should be given to whether equity of exoneration applies, whereby the bankrupt co-owner has taken equity out of the property (re-mortgaged) for their sole benefit. This has major significance where the bankruptcy follows the failure of a project the re-mortgaged proceeds were used to fund such as a business venture. There is a presumption that the amount owing to the secured lender is taken from the bankrupt's share of the equity in the property.
Retaining Ownership of a Property
If co-owners wish to save a property such as a family home, the bankrupt is able to transfer their share in the property to the co-owner pre or post bankruptcy to protect it. The parties should first consider the overall value of their equity in the property if there is an outstanding mortgage.
Transferring the property pre-bankruptcy involves the individual effectively selling his share of equity in the property to the co-owner, the proceeds of which will go to the trustee in bankruptcy. Post bankruptcy, there is generally a 12 month window for transferring the property before the trustee can apply for a possession order.
Any transfer will require the consent of the trustee which will be granted conditionally upon receipt of the amount of the bankrupt's share in the equity of the property. Both the bankrupt and co-owner, as legal owners, must be party to the transfer. Usually the trustee in bankruptcy is also made a party to confirm their consent.
If you hold property as a co-owner and either you or the other owner is facing bankruptcy contact d.cockle@osmondandosmond.co.uk or c.dunbar@osmondandosmond.co.uk or by telephone on 0207 583 3434 and we will help you assess your options.
