PART 3
April 2013
THE FAMILY HOME - BANKRUPTCY ONLY
31.3.69 The family home or ‘use it or lose it’ provisions - background
The provisions that require a trustee in bankruptcy to deal with a bankrupt’s family home within a period of three years from, usually, the date of the bankruptcy order (see paragraph 31.3.80), or lose the right to do so, came into force in 2004 (see paragraph 31.3.73). The changes came about due to concerns that trustees were ‘sitting on’ properties for many years, allowing them to increase in value, before dealing with them. Such a practice is deemed as being unfair on the bankrupt.
31.3.70 The aim of the provisions relating to the family home
The Enterprise Act 2002 [note 1] amended the Act by introducing a new section [note 2], which contained provisions affecting the bankrupt’s family home. The aim of the provisions was to:
31.3.71 Properties to which the provisions apply (a ‘qualifying property’)
Where a property is considered to be a dwelling house (see paragraph 31.3.75), which at the date of the bankruptcy order was the sole or principle residence of [note 3];
It will be considered to be a qualifying family home. Such a property will be referred to as ‘the family home’ for the purposes of this Part.
31.3.72 Effect of the family home provisions
The official receiver, as trustee, has three years beginning with the date of bankruptcy order [note 4] (though see paragraph 31.3.80 for an exception to this start date) within which to deal with (see paragraph 31.3.83) the bankrupt’s interest in any qualifying property (see paragraph 31.3.71), otherwise the property will re-vest in the bankrupt with the consequence that that interest will be lost to the creditors.
31.3.73 The cases to which the family home provisions apply
The family home provisions (see paragraph 31.3.69) apply in all cases where the individual was adjudged bankrupt on a petition presented on or after 1 April 2004. The transitional provisions [note 5] also applied the provisions to any property in a pre-commencement bankruptcy (i.e., one made before 1 April 2004) with the effect that properties in those pre-commencement bankruptcy had to be dealt with (see paragraph 31.3.83) by 1 April 2007.
It has been held that the ‘use it or lose it’ provisions do not apply to a bankruptcy where the order was made under the Bankruptcy Act 1914 Act [note 6].
31.3.74 Provisions can only apply to property which vests at the commencement of bankruptcy
The provisions relating to the family home do not apply to property vested in third parties at the commencement of the bankruptcy. So, for example, where property is recovered for the estate following proceedings related to an antecedent recovery (see Chapter 31.4A), that property cannot be the family home [note 7].
31.3.75 Definition of ‘dwelling-house’
A ‘dwelling house’ is defined as any building or part of a building which is occupied as a dwelling and any yard, garden or outhouse belonging to the dwelling-house and occupied with it [note 8].
31.3.76 Caravan, houseboat or mobile home as a dwelling house
Whilst a ‘touring’ caravan and, possibly but less likely, a houseboat could be considered to be a ‘house’ [note 9], neither would fall under the definition of ‘dwelling house’ for the purposes of the Act as neither are a ‘building’, particularly as they are mobile.
A caravan could be a dwelling house if the wheels are removed and/or it is fixed to a permanent base or stabilising struts and if it is connected to mains services (e.g. electric/water) and cannot easily be detached. This would generally be called a ‘static’ caravan.
A mobile home could be a dwelling house if it occupies an area which is owned or let for a specific purpose of providing permanent occupation and has a significant degree of immobility. Generally, mobile homes are transported on lorries, rather than towed as a caravan.
The official receiver should take each case on its own merits and, where there is doubt, should err on the side of the property being the family home to avoid the risk of the interest being lost to creditors on the expiration of the three year period (see paragraph 31.3.80).
31.3.77 Definition of the bankrupt’s ‘interest’
The bankrupt’s interest in the family home may be in the legal estate or a beneficial interest (see paragraph 31.3.14).
31.3.78 Definition of spouse or former spouse and civil partner or former civil partner
Marriage is a legal process under the Marriages Acts [note 10]. A ‘spouse’ (husband or wife) is an individual’s partner in marriage. ‘Spouse’, therefore, can only refer to a man or woman who is an individual’s partner in a legal marriage; and they must be of the opposite gender (though this is subject to probable legislative change in the near future). A former spouse is one to whom an individual was married but the marriage has been formally dissolved [note 11].
Civil partnership is also a legal process and a ‘civil partner’ can only refer to a man or a woman who is the individual’s partner in that arrangement (and they must be of the same gender). Like a marriage, a civil partnership can only be dissolved by the courts, rendering each partner a ‘former civil partner’ [note 12].
None of these definitions would include a cohabitant/partner even if there are children of the relationship living with or cared for by the cohabitant/partner.
31.3.79 Bankrupt may have more than one family home
The bankrupt may have more than one family home where, for example, he/she lives in one, his/her estranged spouse live in another, and a former spouse lives in a third. If the bankrupt has an interest in any of these properties, they would each re-vest after the three year period (see paragraph 31.3.80) unless dealt with by the official receiver as trustee (see paragraph 31.3.83).
Similarly, the bankrupt or spouse/civil partner, estranged spouse/civil partner, former spouse/civil partner may have more than one residence (for example one in the city for work and another in the country for weekends and holidays) – in which case, he/she would have to elect which property was the principal residence (see paragraph 31.3.63) and, therefore qualifies as the, family home.
31.3.80 Time period for the re-vesting of the bankrupt’s family home
The bankrupt’s interest in the family home will vest in the official receiver on his/her appointment as trustee [note 13]. The property will re-vest in the bankrupt unless it is dealt with in one of the ways outlined in paragraph 31.3.83;
a) three years from the date of the bankruptcy order; or
b) earlier if the official receiver, as trustee, sends notice to the bankrupt that he/she considers that the continued vesting is of no benefit to creditors, or re-vesting would facilitate a more efficient administration of the estate (see paragraph 31.3.87), but
c) if the bankrupt does not inform the official receiver (or any insolvency practitioner acting as trustee) of his/her interest within three months of the date of the bankruptcy order, then the family home will not re-vest until the expiry of three years after the date that official receiver or other trustee becomes aware of the bankrupt’s interest in the property (unless the early re-vesting in point (b), above, applies) [note 14] (see paragraph 31.3.81 for an example)
The interest in the property will re-vest (where appropriate) without conveyance, assignment or transfer [note 15] (see paragraph 31.3.89 for action to take where property re-vests).
31.3.81 Three-year period and non-surrender cases
The legislation provides that the three-year period after which the property re-vests in the bankrupt commences, in the absence of a notification of such from the bankrupt, when he/she becomes aware of the bankrupt’s interest. The official receiver should therefore treat a case as though the three years has begun from the earliest notification of the bankrupt’s interest in the property, whether or not that notification came from the bankrupt. This will minimise the risk of the property interest being lost to the estate.
31.3.82 Notice to be issued to interested parties
When a property has been identified as a qualifying family home, the official receiver, as trustee must send the prescribed form [note 16] to each of (as appropriate) the bankrupt, his/her spouse, his/her civil partner, his/her former spouse or his/her former civil partner them notifying them that the interest in the property forms part of the bankruptcy estate. The title number (see paragraph 31.3.24) should be included on the form where it is known [note 17] [note 18].
The official receiver should endeavour to do this as soon as reasonably practicable after becoming aware that a property is the family home, and not later than 14 days before the expiry of the three-year period (see paragraph 31.3.80) [note 19].
31.3.83 Dealing with the interest in the property
The bankrupt’s interest in the family home will re-vest in the bankrupt (see paragraph 31.3.80), unless the interest is dealt with by one of the following events occurring [note 20]:
a) The official receiver, as trustee, realises (see Part 5), by sale, the interest in the family home.
b) The official receiver, as trustee, applies for a charging order in respect of the bankrupt’s interest in the property (see Part 8).
c) The official receiver, as trustee, applies for an order for sale in respect of the property*.
d) The official receiver, as trustee, applies for an order for possession of the property*.
e) The official receiver, as trustee, agrees with the bankrupt that the bankrupt shall incur a specified liability to the estate in consideration of which the interest will cease to form part of his/her estate*.
*It is anticipated that the official receiver will undertake the actions at points (c), (d) and (e) only in exceptional circumstances, and only with the permission of Technical Section.
31.3.84 Official receiver unable to obtain release until property dealt with
Where the official receiver, as trustee, is dealing with the bankrupt’s interest in the family home and that interest has not been realised (see Part 5), the official will be unable to obtain his/her release as trustee unless [note 21]:
In most cases, this will mean that the official receiver will be able to obtain his/her release until, or soon before, the expiration of the three year period, at the earliest – that is, when a charge is placed over the property interest. A difficulty may arise where there is a protracted interest in respect of which the official receiver has sought an extension of the three year period (see paragraph 31.3.85).
31.3.85 The extension of the three year period for re-vesting of the bankrupt’s interest in the family home
The three year period after which the bankrupt’s interest in the family home will re-vest in the bankrupt (see paragraph 31.3.80) may be extended by order of the court [note 23]. An application for an order in this regard will require the sanction of the Secretary of State (see Chapter 29).
The application for such an extension is likely to be appropriate in the following circumstances (the list not being exhaustive):
In each case the official receiver should seek an extension of the period to six months after the expiration of the date that the official receiver is notified that the property interest has become available. This should give the official receiver sufficient time to deal with the property interest following the guidance in Part 5.
The official receiver should not apply for an extension where the delay has been due to the official receiver failing to deal with the property as the court does would not look favourably on such an application.
31.3.86 Application for extension of time after expiration of three year period
It is unlikely that an application for an extension of the period for dealing with the bankrupt’s property interest (see paragraph 31.3.85) can be made after the expiration of the three year period (see paragraph 31.3.80) and, as a matter of policy, such an application should not be considered.
If the official receiver believes that there are exceptional circumstances why such an application should be made, he/she should first contact Technical Section (Technical.Section@insolvency.gsi.gov.uk).
31.3.87 Early re-vesting of the bankrupt’s interest (amended May 2013)
The legislation [note 24] provides that the official receiver, as trustee, may arrange for the bankrupt’s interest in the family home to be re-vested in the bankrupt earlier than the normal three year period (see paragraph 31.3.80). Such action is likely to be carried out rarely (see paragraph 31.3.88).
Re-vesting is achieved by issuing a notice [note 24a] to the bankrupt that the official receiver, as trustee, considers that the continued vesting of the property in the estate is of no benefit to creditors and/or early re-vesting would facilitate a more efficient administration of the bankrupt’s estate. The property would then re-vest one month from the date of the notice, following which the actions in paragraph 31.3.89 should be carried out.
31.3.88 Early re-vesting of the bankrupt’s interest – only in tightly constrained circumstances
It is anticipated that the official receiver would carry out the early re-vesting of a property (see paragraph 31.3.87) only in one of the following circumstances:
It was formerly the case that the decision to carry out early re-vesting could only be made at director level. That requirement has been discontinued and discretion may now be exercised by the official receiver, as trustee, but only on a case-by-case basis.
31.3.89 Action by the official receiver when the interest in the family home ceases to form part of the estate
(Amended February 2014)
Where a property re-vests early (see paragraph 31.3.87), or through expiration of the three year period (see paragraph 31.3.80), the official receiver must make application, within five days, to the Land Registry to amend the register of proprietorship where the dwelling house is on registered land, using form RX4 for jointly-owned or form RX3 for solely-owned [note 27] [note 28]. The application should be accompanied by evidence of the bankruptcy and the trustee’s appointment, and by a certificate stating that the property interest has re-vested [note 26a].
Where the property is unregistered, the official receiver must issue the bankrupt with a certificate or re-vesting [note 29] [note 29a].
The official receiver should ensure that any insurance is cancelled once the property re-vests with the bankrupt. Further guidance on cancelling insurance is contained in paragraph 49.27B.
The official receiver must also inform [note 25] [note 26] [note 26a]:
that such application has been made.
Where the property re-vests following the obtaining of a charge by the official receiver, the guidance in paragraph 31.3.271 should be followed.
31.3.90 Re-vested property cannot be claimed as after-acquired property
A property interest that has re-vested in a bankrupt under the provisions relating to the family home cannot be claimed as after-acquired property (see paragraph 31.8.61)
Any endowment policy (or similar) taken out with a view to repaying the mortgage on the family home is a separate asset to the property interest. The policy should be dealt with in line with the guidance in Chapter 31.5, Part 6.
31.3.92 Bankrupt holds an interest in a family home in the form of a charge
It is possible that, as a result of a divorce settlement (or similar), the bankrupt holds an interest in a family home (see paragraph 31.3.71) in the form of a charge. In such circumstance, it is probable that the conditions of the charge (imposed by the divorce settlement) are such that it may not be enforced until the expiration of a certain period or until a certain date.
Unless the interest in the charge can be sold, it will be necessary to make application to court for an extension of the three year period in which to deal with the property (see paragraph 31.3.80). The official receiver should also ask for the benefit of the charge to be registered in his/her name (see paragraph 31.3.93), by submitting Land Registry form UN3 (http://www.landregistry.gov.uk/_media/downloads/forms/UN3.pdf).
31.3.93 Obtaining a charge in respect of a charged interest in the family home
It is possible for the official receiver, as trustee, to obtain a charge over an interest charged to the bankrupt [note 30] (see paragraph 31.3.92), but this should not be carried out unless required to allow the official receiver to seek his/her release as trustee (see paragraph 31.3.84) or if the court will not grant an extension of the three-year period for dealing with the interest (see paragraph 31.3.85) as it would not put the official receiver in any better position than the terms of the original charge.
Moreover, the official receiver is likely to experience difficulty in calculating the amount to be charged as there will, in many cases, be a disparity between valuing the charged interest at the date the charging order is sought and its value if calculated at the date of the future event upon which the crystallisation of the interest rests (see paragraph 31.3.278).
If the official receiver decides to seek a charge in respect of the charge he/she should follow the guidance in paragraph 31.3.278. It is anticipated that this will be appropriate where the nature of the original charge is such that the official receiver will be unable to deal with it (and therefore obtain his/her release – see paragraph 31.3.84) for a period in excess of ten years.
[Back to Part 2 – Protection of the official receiver’s interest in a property] [On to Part 4 – Valuation of the property and establishing the insolvent’s interest in the property – including equitable accounting]