Key Post The family home in bankruptcy

[Brendan Burgess]

Some key points which need to be cleared up first

Summary stats based on 2014 bankruptcies
55% of bankrupts lose or will lose their family home.
15% choose to leave it
30% stay in their home
Based on discussion with OA of [broken link removed]

Although most bankrupts do lose their home, bankruptcy helps others to retain their home.
Bankruptcy frees the borrower of their unsecured debt which may make the mortgage sustainable.

Bankruptcy does not affect the lender's right to repossess a home
If the payments are not made, the lender may apply to the courts in the normal way for an order for possession.

The Official Assignee will allow a bankrupt make mortgage payments up to the market level of rent.

A lender will usually not repossess a home, if payments are being made


Where a husband goes bankrupt and the wife is a joint mortgage holder, she is fully liable for the mortgage
Under a mortgage, joint owners are jointly and severally liable. This means that if one person does not pay, the other becomes full liable. So if a husband goes bankrupt, the wife owes the money.

Negative equity is not a sufficient reason to go bankrupt
If a borrower is able to meet their mortgage repayments and other debts,then he is solvent and so would not qualify for bankruptcy. A borrower can't just opt for bankruptcy to get rid of negative equity.

A Personal Insolvency Arrangement may be a better option for keeping the family home
If your mortgage would be sustainable if your unsecured creditors were written off, then you can retain ownership through a PIA. AIB is being very clever about this. They are doing PIAs which last for three months (not 6 years). They use their unsecured debt to vote through the PIA and the borrower emerges with a sustainable mortgage and their unsecured debt written off, effectively immediately. No waiting for 6 years. No waiting for the 3 to 8 years of bankruptcy and Income Payment Orders

The Insolvency Service has a [broken link removed] which sets out 5 cases

I have attached to this post the sections dealing with the family home extracted from a paper by the Official Assignee

 

[Brendan Burgess]

Married man bankrupt; wife, a joint owner, not bankrupt

Negative equity - can afford to meet mortgage payments
1) The bankrupt loses his share of ownership of the family home as it now vests in the Official Assignee
2) From now, on the bankrupt is liable for mortgage payments only up to value of mortgaged property. If he fails to meet the mortgage payments, the bank can possess the house, but can only recover value of property i.e., it cannot pursue him for whatever shortfall there is at time of sale.
3) The wife is liable for the mortgage in full
4) The Official Assignee will allow the bankrupt to pay reasonable accommodation costs, typically €1,500 a month for a family home (The OA uses DAFT to determine what a reasonable level of rent would be for a family of that size in that location.)
5) If the €1,500 and whatever the wife pays is sufficient to pay the mortgage, the bank will be happy.
6) The OA will offer to sell the wife his interest in the home for €5,000. If she has the money, she ends up owning the house in full and owing the mortgage in full
7) If she cannot afford the €5,000 , but she and her husband continue to pay the mortgage, they stay in their home. They should try to buy back the OA's interest before the property exits negative equity.

Joint judgement mortgages
Would be the same as an ordinary mortgage. The wife will become fully responsible for the debt.

A judgement mortgage against him
Not sure what happens

Negative equity - can't afford to meet mortgage repayments
1) The bankrupt loses his share of ownership of the family home as it now vests in the Official Assignee
2) From now, on the bankrupt is liable for mortgage payments only up to value of mortgaged property. If he fails to meet the mortgage payments, the bank can possess the house, but can only recover value of property i.e., it cannot pursue him for whatever shortfall there is at time of sale.
3) The wife is liable for the mortgage in full
4) As the bankrupt and his wife cannot afford to meet the mortgage payments, the lender will seek a voluntary sale - the wife will be fully responsible for the mortgage shortfall. The bankrupt has no further liability.
5) If the wife does not agree to a voluntary sale, the lender will seek an order for possession. The OA will not object to such an order.
6) It is likely that court will grant the order after many adjournments. If the wife's financial position improves in the meantime and she makes reasonable payments, the court will probably not grant the order.


Positive equity

1) The bankrupt loses his share of the ownership of the family home and it vests in the Official Assignee
2) The OA will offer to sell his share in the home for €50k to the wife
3) If she buys it, the house and mortgage will be in her own name.
4) If she can't afford to buy out her husband's share, the Official Assignee will sell the house. She will get €50k and the other €50k will be used towards paying her husband's creditors.
5) The Official Assignee will give the wife plenty of time to raise the €50k

 

[Brendan Burgess]

Single man bankrupt

Negative equity - can afford to meet mortgage payments
1) The bankrupt loses ownership of the family home as it now vests in the Official Assignee
2) From now, on the bankrupt is liable for mortgage payments only up to value of mortgaged property. If he fails to meet the mortgage payments, the bank can possess the house, but can only recover value of property i.e., it cannot pursue him for whatever shortfall there is at time of sale.
3) The Official Assignee will allow the bankrupt to pay reasonable accommodation costs, say €800 a month. (The OA uses DAFT to determine what a reasonable level of rent would be for an individual in that location.)
5) If the €800 is sufficient to pay the mortgage, the bank will be happy and take no further action
6) After three years, the bankrupt will be discharged from bankruptcy
7) If the house is in negative equity, he should do nothing. The house continues to vest in the OA and the bank continues to be happy with the payment it is getting.
8) When the house is approaching positive equity he should buy out the ownership of the house from the Official Assignee for €5,000.
9) If he continues to meet the repayments but does not buy out the house the equity which he builds up will be of benefit to the OA.


A judgement mortgage against him
Not sure what happens

Negative equity - can't afford to meet mortgage repayments
1) The bankrupt loses his ownership of the home as it now vests in the Official Assignee
2) From now, on the bankrupt is liable for mortgage payments only up to value of mortgaged property. If he fails to meet the mortgage payments, the bank can possess the house, but can only recover value of property i.e., it cannot pursue him for whatever shortfall there is at time of sale.
3) As the bankrupt cannot afford to meet the mortgage payments, the OA will surrender the house to the lender.

Positive equity
1) The OA will sell the house and pay the proceeds to the creditors.
2) The sale of the house will be one of the last actions of the OA, so the bankrupt will have plenty of time to sort out alternative accommodation.

Whereas the OA needs a court order to sell a family home, the home of a single person is not deemed a family home and so a court order is not required.

This is all a bit academic, as the OA to date, has never sold the home of a single person in positive equity. By the time, it gets to bankruptcy, other creditors will have lodged Judgement Mortgages against the property.

 

[Waver]

Single man bankrupt

Negative equity - can afford to meet mortgage payments
1) The bankrupt loses ownership of the family home as it now vests in the Official Assignee
2) The bankrupt no longer owes the mortgage
3) The Official Assignee will allow the bankrupt to pay reasonable accommodation costs, say €800 a month. (The OA uses DAFT to determine what a reasonable level of rent would be for an individual in that location.)
5) If the €800 is sufficient to pay the mortgage, the bank will be happy and take no further action
6) After three years, the bankrupt will be discharged from bankruptcy
7) If the house is in negative equity, he should do nothing. The house continues to vest in the OA and the bank continues to be happy with the payment it is getting.
8) When the house is approaching positive equity he should buy out the ownership of the house from the Official Assignee for €5,000.
9) If he continues to meet the repayments but does not buy out the house the equity which he builds up will be of benefit to the OA.


A judgement mortgage against him
Not sure what happens

Negative equity - can't afford to meet mortgage repayments
1) The bankrupt loses his ownership of the home as it now vests in the Official Assignee
2) The bankrupt no longer owes the mortgage
3) As the bankrupt cannot afford to meet the mortgage payments, the lender will sell the house.

Is this scenario from the ISI?

Why would the OA sell a house for €5000 to the discharged bankrupt? Is it not his duty to maximise the return for the creditors? This would mean selling for fair market value and sending the bankrupt off to rent elsewhere?

 

[Brendan Burgess]

If a bankrupt remains in the home and continues to pay the mortgage what happens after discharge from bankruptcy?

1) When the Court adjudicated the applicant bankrupt, he loses ownership of the family home as it now vests in the Official Assignee
2) From now, on the bankrupt is liable for mortgage payments only up to value of mortgaged property. If he fails to meet the mortgage payments, the bank can possess the house, but can only recover value of property i.e., it cannot pursue him for whatever shortfall there is at time of sale.


The discharge from bankruptcy doesn't change this for the the bank, the borrower or for the Official Assignee in any way. The Official Assignee still owns the property. The discharged bankrupt's liability is limited to the value of the property. The lender will be happy as long as agreed repayments are being made and if they are not, they can seek an order for repossession.

If the property were in positive equity, the OA would have sold it and paid the proceeds into the estate for the benefit of creditors.

If the property is in negative equity, and the borrower no longer wishes to live in the house, they can simply walk away without any further liability.

If the property is in deep negative equity, and the borrower wants to stay in the home, he should continue to pay the mortgage. A combination of capital repayments and house inflation, if any, would eventually bring the house out of negative equity. As the house is approaching coming out of negative equity, he should apply to the Official Assignee to buy out the OA's interest in the house. Current policy is to sell the interest of a house in negative equity for €5,000.

If the borrower does nothing for years and the house builds up positive equity, then that will accrue to the Official Assignee. If the borrower wants to buy the house, the OA will sell it to them for the market price less the mortgage.

 

[Brendan Burgess]

Left blank for further posts

 

[Brendan Burgess]

Is this scenario from the ISI?

Why would the OA sell a house for €5000 to the discharged bankrupt? Is it not his duty to maximise the return for the creditors? This would mean selling for fair market value and sending the bankrupt off to rent elsewhere?

Hi Waver

He would not sell a property in positive equity to the discharged bankrupt for that price.

That is the price he sells a house in negative equity for.

Brendan

 

[Waver]

Hi Waver

He would not sell a property in positive equity to the discharged bankrupt for that price.

That is the price he sells a house in negative equity for.

Brendan

I would have thought unlike the other scenarios where there was a joint mortgage that continued to exist when one party went bankrupt that in this case there was no longer a mortgage so the house is in negative equity and would be sold by the OA whenever he decides it will give a better return to sell on the open market than to continue to rent to the bankrupt.

 

[Brendan Burgess]

The bankrupt can, and often does, simply decide to vacate the house. The OA in that case hands it back to the bank.

Under this scenario, the creditors get €5,000 more. In many cases, the borrower's accommodation costs will be lower as well.

Brendan

 

[Brendan Burgess]

Niall Brady posted this on Twitter

What's the point in reducing bankruptcy term to a year if, according to official assignee, status of family home unchanged?

There are pros and cons of reducing the bankruptcy term to one year e.g. allowing bankrupts to get a fresh start quicker. But keeping the family home is not one of the reasons.

 

[Waver]

The bankrupt can, and often does, simply decide to vacate the house. The OA in that case hands it back to the bank.

Under this scenario, the creditors get €5,000 more. In many cases, the borrower's accommodation costs will be lower as well.

Brendan

How is it €5000 more?

If the house has a market value of €200,000 and there is no joint owner who continues to have an interest why can the OA not sell it for €200,000?

 

[Brendan Burgess]

Hi Waver

He can sell it for any price he likes. He values his stake in a negative equity home as €5,000. If a bankrupt doesn't like it, tough.

Brendan

 

[Waver]

Hi Waver

He can sell it for any price he likes. He values his stake in a negative equity home as €5,000. If a bankrupt doesn't like it, tough.

Brendan

I suppose my question is how is it a negative equity home if there was only one borrower who is now bankrupt? Surely the mortgage is gone and the property should be sold for market value rather than for the €5000 it would be sold to a joint owner in a case where a mortgage continued to exist?

 

[Brendan Burgess]

Hi Waver

I see what you are saying now.

Say a property is worth €200k and the mortgage is €300k. The mortgage remains secured on the property. It does not just disappear and convert negative equity of €100k into an asset of €100k.

If the borrower just abandons the property, the OA hands the property back to the bank, and the shortfall of €100k becomes an unsecured creditor.

Brendan

 

[Matthew Moore]

If a bankrupt remains in the home and continues to pay the mortgage what happens after discharge from bankruptcy?

1) When the Court adjudicated the applicant bankrupt, he loses ownership of the family home as it now vests in the Official Assignee
2) From now, on the bankrupt is liable for mortgage payments only up to value of mortgaged property. If he fails to meet the mortgage payments, the bank can possess the house, but can only recover value of property i.e., it cannot pursue him for whatever shortfall there is at time of sale.


The discharge from bankruptcy doesn't change this for the the bank, the borrower or for the Official Assignee in any way. The Official Assignee still owns the property. The discharged bankrupt's liability is limited to the value of the property. The lender will be happy as long as agreed repayments are being made and if they are not, they can seek an order for repossession.

If the property were in positive equity, the OA would have sold it and paid the proceeds into the estate for the benefit of creditors.

If the property is in negative equity, and the borrower no longer wishes to live in the house, they can simply walk away without any further liability.

If the property is in deep negative equity, and the borrower wants to stay in the home, he should continue to pay the mortgage. A combination of capital repayments and house inflation, if any, would eventually bring the house out of negative equity. As the house is approaching coming out of negative equity, he should apply to the Official Assignee to buy out the OA's interest in the house. Current policy is to sell the interest of a house in negative equity for €5,000.

If the borrower does nothing for years and the house builds up positive equity, then that will accrue to the Official Assignee. If the borrower wants to buy the house, the OA will sell it to them for the market price less the mortgage.

So bankruptcy effectively converts the mortgage into a non-recourse loan in this case?

What happens to the mortgage term and any arrears built up prior to bankruptcy?

From a contractual perspective, how has the mortgage changed; is bankruptcy in itself not a reason for them to have access to repossession proceedings in the future, even if meeting a full agreed payment?

 

[Brendan Burgess]

So bankruptcy effectively converts the mortgage into a non-recourse loan in this case?

Yes, that is a good way of looking at it.

What happens to the mortgage term and any arrears built up prior to bankruptcy?

The mortgage term does not change.

Let's say that the total mortgage is €240k of which €40k is arrears. The only relevant figure is the €240k. If the lender is satisfied with the level of repayments, then they will not initiate repossession proceedings. If they are not happy with the level of repayments, they will ask the OA to surrender the house.

From a contractual perspective, how has the mortgage changed; is bankruptcy in itself not a reason for them to have access to repossession proceedings in the future, even if meeting a full agreed payment?

The key point here is that if the lender is receiving the full repayments, why would they seek repossession? Lenders are in the business of lending money. If they have a profitable mortgage which is being serviced, they don't want to give it up.

A lender might want to repossess a home where it's a cheap tracker mortgage. I don't know if they are trying to do so. I doubt it.

It's also possible that the lenders which have exited the market, e.g., Danske and Bank of Scotland Ireland, might try to repossess the property. But again, I don't think that they would do so if they are being repaid.

 

[Nobizere]

After reading several newspaper articles and hearing comments on radio and TV, my wife is convinced we'll be able to keep our home in bankruptcy. I'm of the opposite opinion. Here's our situation.

We both signed personal guarantees for our business. Her guarantees are €30k less than mine. The total is €440,000. We can't pay anything.
Our house is worth c.€340,000. The mortgage which is up to date is €230,000.

So there is possibly €110,000 equity in the house. If only I were to be bankrupt, she would be on the hook for €410,000 of the debt and would likely be chased by debtors. (Living below the minimum recommended by the ISI doesn't bother creditors, as we found out in court last month when a payment order was made.)

My understanding is that the OA has no choice but to take the home as it has equity that can be dispersed to creditors after a sale. Is there ever a situation where both husband and wife are bankrupt, that a home with that much equity can be held onto?

 

[Stuboy]

perhaps some of the financial experts on here could correct me if I'm wrong, but are the guarantees considered secure loans when it comes to the family home in bankruptcy?
I don't think so, but I may be wrong.
Your wife may be right. I think some professional advisers on here should be able to answer that for you, but the fact that you are able to service your mortgage might enable you to keep the house.

 

[Nobizere]

Thanks Stuboy. I forget to mention that all the guarantees have since been (effectively) turned into loans by court judgements.

 

[Silvio Dante]

Nobizere,

If you can give me some info I can probably help (not dissimilar situation but probably a few years on)

Have you maintained the mortgage since getting into difficulty?

Do you have children?
If so what ages (roughly even)?

Has the business been wound up and how long ago?

When did the lender get judgement?

Who is the lender?