Exempt Property

March 2007

Introduction

1. What is exempt property? 

Exempt property does not form part of the bankrupt’s estate and is therefore not automatically available to the trustee to realise on behalf of the creditors Property which should be treated as exempt is defined in detail in Section 283(2) of the Insolvency Act 1986 and consists of clothing, bedding, furniture household equipment and provisions necessary to satisfy the basic domestic needs of the bankrupt and his/her family and tools, books, vehicles and other equipment necessary for the personal use of the bankrupt to continue his/her employment, business or vocation.

NB Please note that these provisions only relate to bankruptcy cases/estates and do not apply to property owned by partnerships.

For more information see Technical Manual Chapter 31.2 : part 3 paragraph 31.2.17

2. Exempt assets in the home 

It is rare for household items to be claimed and sold by the official receiver as they generally have little second hand value. In cases where the official receiver is aware that the bankrupt’s home contains items of a high resale value, such as antiques, these should be claimed for the estate.

Items in the home such as computer equipment, stereo equipment, televisions and video recorders are not exempt assets as they are not necessary to satisfy the basic domestic needs of a bankrupt and his/her family although they may be exempt if the bankrupt needs them for his/her employment or business. Again, such items will usually have little second hand value and will therefore be rarely claimed for the estate.

3. Bankrupt’s right to claim property as exempt 

A bankrupt has the right to claim that an item is necessary for his/her family’s basic domestic needs or to carry out his/her work. Where he/she wishes to claim a particular item, the bankrupt's request should be dealt with at the initial interview and be recorded in the narrative statement or in the supplementary questions to the preliminary information questionnaire (PIQ) and the bankrupt notified on form REPR Exempt Property - official receiver's letter accepting/rejecting claim. Any request received after interview should be referred immediately to the examiner. There must be a clear record of any decisions made, in case of any difficulties that may arise later.(LOIS CA08/15).

It is up to the bankrupt to satisfy the official receiver that the item he/she is claiming is necessary and therefore should be treated as exempt. If the official receiver believes and has reasonable grounds for believing that the property is not exempt, he/she is entitled to treat the property as part of the estate and deal with it accordingly. Where the bankrupt is unwilling to accept the official receiver’s view that that the item is not exempt, the matter should be referred to the examiner.

If the official receiver has information to suggest that assets may be exempt, but the bankrupt has made no such claim, the official receiver should draw the bankrupt’s attention to the exempt property provisions set out in the Insolvency Service's publication, Guide to Bankruptcy Part 7 paragraph c), which is included in the initial package sent to the bankrupt.

 

4. Items necessary for the bankrupt to continue his/her employment, business or vocation

The item in question must be necessary for the bankrupt’s personal use for it to be considered as exempt. This does not mean that the item in question is for the exclusive use of the bankrupt, however if the item is for use by a spouse /civil partner or employees and not by the bankrupt, it is not to be treated as exempt. Each case will need to be considered on its own merits by the examiner.

Under no circumstances can the bankrupt claim stock or trading premises as exempt property. These assets will form part of the estate and as such can be realised. If the bankrupt cannot then continue in business, any other items which had been treated as exempt whilst the bankrupt was trading, such as tools, books and vehicles, will become available for realisation.

 

5. Plant and machinery 

Plant and machinery needed to carry out a business such as a JCB and cement mixer for a builder, can be treated as exempt where the bankrupt intends to continue to trade and the items are vital to allow the business to continue. Where trading has ceased and is unlikely to re-start, any such business assets are not needed by the bankrupt and thus can be realised as they are not exempt.

Before the official receiver decides whether to allow plant and machinery to be treated as exempt in the case of a bankrupt who continues to trade, he/she must consider whether the business is viable, likely profitability, ability to make payments under an income payment agreement/income payment order and the bankrupt’s prospects of obtaining other employment. Where the removal of such property from the bankrupt will result in him/her losing his livelihood, the long term cost to the State must also be taken into consideration.

Most plant and machinery of high value is likely to be on lease or subject to a hire purchase agreement or it may be covered by the terms of a charge given to a loan creditor such as a bank and therefore not realisable. Any other non-exempt plant will be available for realisation but it may be wise to ask agents to inspect the condition before instructing them to sell, as it is frequently obsolete or in poor condition.

 

6. Motor Vehicles

Exempt property does not form part of a bankruptcy estate and is therefore not automatically available to the trustee of that estate to deal with on behalf of the creditors. Amongst the items that may be exempted are motor vehicles that are necessary for the personal use of the bankrupt in his/her employment, business or vocation or that are necessary to meet a basic domestic need of the bankrupt and his/her family (see paragraphs vii and viii below). It is for the bankrupt to prove to the official receiver that a vehicle is exempt property.

Where there is any doubt as to the ownership of a vehicle, the official receiver should ask for additional evidence regarding the provision of the funds to purchase the vehicle. It is possible that a bankrupt’s car may have been bought by a third party such as a parent so that, although the bankrupt is shown as the registered keeper, that third party is the owner of the vehicle and the official receiver can take no action to realise it.

The official receiver can exempt a vehicle subject to a finance agreement as long as it fulfils the usual criteria. The hiring owner (the finance company) should be notified of the bankruptcy order, whether the bankrupt has claimed the property as exempt and if the official receiver has accepted the claim. If the hiring owner is unhappy with the position where, for example, the bankrupt is in arrears with the payments, it may exercise a right to terminate the agreement and repossess the vehicle.

For further information see Case Help Manual parts:Assets Subject to Credit and Motor Vehicles.

A vehicle should only be left with a bankrupt where it has been agreed by the official receiver that it is exempt and has met the necessary criteria (see paragraphs vii and viii below). However, where a decision is made that the vehicle is not exempt property the bankrupt should be informed of the straightforward process available to him/her to purchase and retain the vehicle.

If it has been agreed that the vehicle is of low value, form REPR should be issued in duplicate and a copy given/sent to the bankrupt (DO73). If it has been agreed that the vehicle has excess value the examiner will confirm whether it is in order to instruct the official receiver's agents to sell and replace the vehicle accordingly.

For more information see Case Help Manual parts: Agents, Assets subject to credit and Motor Vehicles .

 

7. Motor vehicles necessary for use personally by the bankrupt in his/her employment, business or vocation 

If the vehicle is necessary for use personally by the bankrupt in his/her employment, business or vocation, the official receiver can consider a claim from the bankrupt for an exemption for that vehicle.

For the vehicle to be treated as exempt, it must be necessary to the search for and/or sustaining of paid employment, and, in this way, is an essential item to enable the bankrupt both to support himself/herself and his/her family and, potentially, contribute to his/her estate via an income payments agreement/order.

Caring for others can be a vocation, either formally e.g. nurses, care assistants or informally e.g. caring for a relative. The definition of "employment, business or vocation" has been widened to include debtors who are informal, full-time, carers of a disabled friend or relative, who would use the vehicle in connection with that role. The official receiver must carefully consider all matters when the bankrupt has a vocation as a carer. For more detailed guidance see Technical Manual Chapter 31.2 Part 3 paragraph 31.2.22(b) .

The principal points to be considered by the official receiver when making the decision regarding exemption are :-

  • that the vehicle is used by the bankrupt in the course of his/her, employment, business or vocation, or 
     
  • that the bankrupt could not reasonably travel to and from his/her place of employment without a vehicle, due to lack of alternative transport, or
  • that the bankrupt’s prospects of obtaining employment (including work if the bankrupt is in self-employment) would diminish without use of the vehicle, even though the bankrupt may not be in employment, or, if self-employed, have work, at the date of the bankruptcy order. (In such cases, the official receiver will need to decide whether there is a reasonable prospect of the bankrupt obtaining work), or
  • that the bankrupt’s prospect of obtaining employment would diminish even if a vehicle requires repair but once repaired will be used to travel to work or to seek employment.

8. Motor vehicles necessary to meet a basic domestic need of the bankrupt and his/her family

Particular care must be taken when assessing whether an exemption under these provisions apply, to ensure that the exemption is only applied to meet a genuine need and not simply as a matter of convenience.

If the use of a vehicle does not meet the test of necessity the vehicle is vested in the bankruptcy estate and the official receiver should pursue with the bankrupt the option to make a reasonable offer for the purchase of the vehicle. For further information see Case Help Manual part :Motor Vehicles.

A common claim that a vehicle meets a basic domestic need will be from bankrupts who suffer from a disability and state that the motor vehicle in question is necessary for mobility. In most cases, the bankrupt will be unable to work by reason of their disability. Where this is the case, the official receiver must be satisfied that the vehicle allows the bankrupt a degree of independent living which would be impossible without the retention of a vehicle, and/or that there is no practical alternative to allow the bankrupt to undertake routine medical appointments or care associated with their disability. For more detailed guidance see Technical Manual chapter 31.2 - Part 3 paragraph 31.2.23.

A decision that a vehicle is exempt property, unless the vehicle is required for employment or is by reason of the bankrupt's disability, must be confirmed by an assistant official receiver.

 

9. Can exempt property ever be claimed by the official receiver? 

Section 308 of the Insolvency Act 1986 gives the official receiver as trustee the right to claim exempt property if he/she is of the opinion that the value of the item in question is such that it could be sold, reasonably replaced and still produce a surplus for the estate.

The official receiver may not claim such items until he/she is trustee. As receiver and manager, he/she can identify any item he/she considers may fall within this section but take no action other than to instruct the bankrupt to insure the item in question and inform him/her in writing that he/she may not dispose of it. The bankrupt should also be informed that the official receiver’s decision to allow him/her to retain the item temporarily does not extend to any future trustee who may take the view that the item is not exempt and claim it for the estate. Where a bankrupt refuses to co-operate in protecting the asset, the official receiver can take the item into safekeeping and, by applying to the court for directions, gain the authority to sell the item and release funds to enable it to be replaced.

Where the official receiver as trustee decides to claim an exempt asset because he/she considers it to be of too great a value for the bankrupt to retain it, he/she must provide the bankrupt with funds from the sale proceeds to purchase a reasonable replacement either by way of payment directly to a vendor or by providing a cash allowance to the bankrupt to purchase e.g. a vehicle where the bankrupt may be able to get a better deal. Where cash is provided to the bankrupt then evidence of the purchase should be requested within 21 days.

For further information see Case Help Manual part : Motor Vehicles

No action should ever be taken by the official receiver to claim exempt property until he/she is satisfied that there will be a net benefit to the estate and a conservative view of the value of the item should therefore be taken so as to provide a reasonable margin of safety.

 

10. How does the official receiver claim exempt property? 

The official receiver as trustee can claim exempt property for the estate by giving notice in writing to the bankrupt within 42 days of becoming aware of the property. Where the official receiver is trustee, this 42 days runs from the date on which he/she became trustee even if he/she was aware of the item whilst still receiver and manager. The time limit can be extended by application to the court where necessary.

 

11. Can the bankrupt challenge the official receiver’s decision to claim exempt property? 

The bankrupt should be informed that he/she may challenge the official receiver’s decision to claim exempt property for the benefit of the estate under section 303 of the Insolvency Act 1986, which allows him/her to apply to the court if he/she is dissatisfied with any act, omission or decision of the official receiver. The court may then confirm, reverse or modify the official receiver’s action as it sees fit. In practice, it is unlikely that a section 303 application will be made as, in cases of dispute, the official receiver will tend to apply to the court for directions to resolve the matter.

 

Notes 

a  Where a decision is made to allow a bankrupt to retain exempt property of excess value, the information about the exempt property should be included in the report to creditors as should all other assets deemed to be exempt property. Any other enquiries from creditors regarding exempt property should be dealt with as they arise.

b  Where the official receiver intends to provide funds to enable an exempt item of excess value to be replaced with a reasonable alternative, he/she is under no duty to provide those funds until there are sufficient funds in the estate to do so, although he/she should ensure that the bankrupt is without the asset for as short a time as possible.

c  The official receiver may not subsequently disclaim exempt property claimed under section 308 without applying to the court for leave to do so.

d  The official receiver as trustee can accept an offer from a third party to pay into the estate a sum of money and leave the bankrupt in possession of the property if he/she is satisfied that the sum offered will benefit the estate to the same extent as if the property had been sold and a reasonable replacement purchased.

e  All details relating to the decision to exempt an asset such as statements or letters from the bankrupt, notes of telephone calls and a record of the decision reached should be recorded on the official receiver‘s file as a point of reference in the event that difficulties arise later.

Where can I find out more? 

Insolvency Act 1986: 

section 283(2) - Definition of exempt property

section 287(3)(a) - Official Receiver’s duty to protect property whilst receiver and manager 

section 308 - Trustee’s power to claim exempt property of excessive value

section 309 - Time limit for claiming property under s308

section 315(4) - Leave of court required to disclaim

Insolvency Rules 1986:

R6.187 - Purchase of replacement property 

R6.188 - Money provided in lieu of sale 

The Insolvent Partnerships Order 1994: 

Sch 4, Part II, Para 28 

Sch 7, Para 7 

Technical Manual:

Chapter 30 - Exempt property

Chapter 18 – Reports to creditors and contributories

Chapter 31.2 - Motor vehicles

Chapter 31.2 part 3 - Vehicles which are Exempt Property (Bankruptcy only) 

Chapter 31.6 part 4 - Plant and machinery 

Chapter 53 part 2 and part 3 - No exempt property in partnerships (para 53.37 and 53.81)

Case Help Manual: 

Agents

Assets Subject to Credit

Motor Vehicles

Reports to Creditors 

Forms to be used: 

REPR Exempt property - official receiver’s letter accepting/rejecting claim 

Insolvency Service leaflet:


Guide to Bankruptcy - Section 7c – How will bankruptcy affect you?-Your assets

 

Exempt Property flowchart 

 

Procedure


LOIS references are in brackets eg (DO 73)

1 Receive instructions from examiner where bankrupt has made a claim for an asset to be treated as exempt.

2 If the bankrupt has claimed an asset as exempt, ensure that the examiner has recorded request in the narrative statement or supplementary questions to the PIQ and completed form REPR Exempt Property- official receiver’s letter accepting/rejecting claim, and that a copy has been given/sent to the bankrupt.

3 Refer any request received after interview to claim property as exempt, to the examiner for instructions.

4 Where the asset has been given exempt status, note LOIS accordingly, (CA08/CA15).

5 Ensure that the information regarding the exempt asset is included when drafting the report to creditors.

6 Where a decision has been made that the asset in question is not to be treated as exempt, leave 14 days before taking any further action to give the bankrupt sufficient time to appeal against the official receiver’s decision.

7 If bankrupt informs you that he/she wishes to challenge the decision not to exempt an item, ask him/her to place the objection in writing and then pass the letter to the examiner, once received.

8 Note the decision on LOIS (CA08/CA15). 

9 After the 14 day period is up, check whether the examiner wants you to instruct agents. If so, telephone agents with appropriate instructions and then confirm in writing (see Case Help Manual part : Agents).

10 Deal with any creditor queries regarding exempt assets as and when they arrive in the office. Where a creditor has any serious objection to the bankrupt’s retention of an exempt asset, pass the letter to the examiner for reply.

11 In a case where a trustee other than the official receiver is appointed, ensure that the insolvency practitioner’s attention is drawn to the exempted property on handover

12 Where the exempt asset is to be sold and replaced, funds must be provided from the sale proceeds to purchase a reasonable replacement, either by payment directly or a cash allowance.