Key Post What happens a jointly owned family home in bankruptcy?

Brendan Burgess

Brendan Burgess

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This has come up a few times and so a Key Post is needed. I have no practical experience of this, so this is based on my desk research. I welcome corrections and comments.

The Official Assigneee(OA) has issued [broken link removed] from which we can infer his approach to these cases. However, he has a lot of discretion and so there is still a lot of uncertainty.

To try to get an understanding of this issue, I will restrict this thread to a jointly owned family home. If you wish to ask about a variation of this , e.g. a single owner or a rental property, please start a separate thread.

Extract from ISI Case Study - see attachment to this post
FAMILY HOME As the mortgage is being paid Gerry’s mortgage bank has elected to stay outside the bankruptcy and rely on its security.

The family home has a value of € 180,000 and there is an outstanding mortgage of € 160,000. There is therefore € 20,000 equity in the family home. As Gerry’s share of the family home is now vested in the Official Assignee, 50% of the € 20,000 belongs to the Official Assignee.

His wife will have the option to purchase the Official Assignee’s interest in the family home for € 10,000 [50% of the Equity]. The Official Assignee will have to apply to Court to sell this interest to Sheila.

If Sheila is unable to raise the funds immediately she may apply to the Court for a postponement on the order for sale to enable her to raise the finance. The Court will consider the interests of the creditors, Sheila and their children in considering whether to postpone a sale. If Sheila cannot purchase the Official Assignee’s interest, the Official Assignee will apply to Court for an order for Sale.
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House in positive equity

  • Jointly owned house
  • Both names on mortgage
  • Value €180k
  • Mortgage €160k
  • Husband is bankrupt
  • Wife is not bankrupt
The bankruptcy causes the joint ownership to split. The Official Assignee (OA) and the wife then hold separate interests in the property.

The bankrupt no longer owes any money and has no further ownership of the house.

As the wife is jointly and severally liable for the full mortgage, she now owes the full €160k in her own right.

The equity in the house is €20k
The OA's share is €10k

The OA will probably want to sell his share of the house

His wife will have the option to purchase the Official Assignee’s interest in the family home for € 10,000
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It's not at all clear that the wife has the right to buy the OA's interest. It does seem to be the OA's policy to sell it for €10,000 which is good news.

He will probably give the wife plenty of time to raise the necessary finance.

The OA will allow the husband reasonable accommodation expenses in bankruptcy so he can contribute to the mortgage.

If the wife continues paying the mortgage in full, the lender won't take any action to repossess the property.

Can the bank refuse to allow his wife to buy the OA's share of the equity?
Let's say that the mortgage was a cheap tracker. Could the bank refuse to allow the OA sell his share of the property to the wife? I don't think so. The wife is automatically responsible for the full mortgage anyway.

The bank might hope that she can't raise the €10k required to buy the OA's share and so the house will be sold. But if the wife can raise the €10k, then the bank won't have any role in it.
 

Attachments

  • ISI Case Study Gerry positive equity Jan 2014.pdf
    192.5 KB · Views: 666
Extract from ISI Case Study - Leo (See attachment)

FAMILY HOME As the mortgage is being serviced Leo’s mortgage bank has elected to stay outside bankruptcy and rely on its security.

The family home has a value of € 150,000 and there is an outstanding mortgage of € 260,000. There is therefore no equity in the family home. As Leo’s share of the family home is now vested in the Official Assignee, 50% of the family home belongs to the Official Assignee.

Nora will have the option to purchase the Official Assignee’s interest in the family home for an agreed sum plus the Official Assignee’s costs. As there is no value in the Official Assignee’s interest in the property, he may choose to sell the family home to Nora for a reasonable sum. In determining a figure the Official Assignee will have regard to the value of the property, the amount of negative equity and how long the property may remain in negative equity. He will further have regard to the other assets and circumstances in the bankruptcy estate. The Official Assignee is bound to achieve the best possible return for the creditors and in that regard each individual case will be assessed differently. For the purposes of this scenario the Official Assignee values the interest at € 5,000 and estimates costs of € 2,500. The Official Assignee will have to apply to Court to sell this interest to Nora. If Nora cannot purchase the Official Assignee’s interest this will remain vested in the Official Assignee.
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Negative equity

  • Jointly owned family home
  • Both names on mortgage
  • Value €150k
  • Mortgage €260k
  • Husband is bankrupt
  • Wife is not bankrupt
The bankruptcy causes the joint ownership to split. The Official Assignee (OA) and the wife then hold separate interests in the property.

As the wife is jointly and severally liable for the full mortgage, she now owes the full €260k in her own right.

The OA will allow the husband reasonable accommodation expenses.

If the wife continues paying the mortgage in full, the lender won't take any action to repossess the property.

The OA is not under any time pressure to take any action on this and may be content to sit on it for years and hope that between house price rises and mortgage repayments, equity will build in the house.

If the wife wants to get full ownership of the house...
The OA proposes that he will sell his interest in the house in negative equity for €5,000 + €2,500 legal costs. (In the UK, the Official Receiver sells the interest for £1 + legal costs)

It seems strange that the wife would have to pay €5,000 for something which is worth nothing. It may be fair enough for her to pay the legal costs. But as the OA says "[FONT=&quot]In determining a figure [to sell the equity for] the Official Assignee will have regard to the value of the property, the amount of negative equity and how long the property may remain in negative equity. He will further have regard to the other assets and circumstances in the bankruptcy estate."[/FONT]

If she does not buy out the OA, he will continue to own half the house.

, who has split from his bankrupt Ex, got asked for €5,000 from the OA.

If the wife wants to surrender the house to the lender...
If the wife cannot afford the mortgage repayments, she can surrender the house to the lender but she will still be liable for the shortfall of €110,000.

So her husband's bankruptcy could trigger her own insolvency.

If the lender decides to repossess the house...
If the wife does not pay the mortgage, the lender may start repossession proceedings. As the mortgage exceeds the value of the property, it's likely that the OA will consent to repossession.

The wife will be liable for the shortfall.
 

Attachments

  • ISI Case Study negative equity Jan 2014.pdf
    225.9 KB · Views: 707
In scenario 1 Gerry, this brought the 'realisation' fee to 6,550 Euro.
1 The Realisation Fee is calculated based on a sliding scale as follows: Administration Fee amount @ 0%, the next €1,500 @ 100%, the next €6,500 @ 50% , the balance up to €1m at 15% and the balance thereafter at 1%.

Admin fee percentage is zero (don't understand this at all)
6500 at 50% is 3250
remainder at 15%, in Gerrys case this must be 3300. So it has to be based on 22K, which is the amount Gerry is bringing into the bankrupcy, But it's not 22K plus 6500K? Shouldn't it be 22K minus 6500 first?
 
Bronte said:
In scenario 1 Gerry, this brought the 'realisation' fee to 6,550 Euro.
1 The Realisation Fee is calculated based on a sliding scale as follows: Administration Fee amount @ 0%, the next €1,500 @ 100%, the next €6,500 @ 50% , the balance up to €1m at 15% and the balance thereafter at 1%.

Admin fee percentage is zero (don't understand this at all)
6500 at 50% is 3250
remainder at 15%, in Gerrys case this must be 3300. So it has to be based on 22K, which is the amount Gerry is bringing into the bankrupcy, But it's not 22K plus 6500K? Shouldn't it be 22K minus 6500 first?
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Hi Bronte

I don't think that this is especially relevant to the thread. The Realisiation Fee is the fee which the OA deducts from the estate, before distributing the assets to the creditors. It does not affect the price which the wife pays to buy out her husband's share of the family home.
 
In this situation, what if the husband is underwater financially and has no option but to go bankrupt. His wife is not involved in any of his commercial and investment loans.
There is no mortgage on the family home.
What happens in this situation can anyone tell me?
Does the OA try and get the 50% value of the home from the wife?
Has he any rights over the family home?
 
HI Commercial,

I covered this in the very first post with the example of a house in positive equity. The only difference in your case is that the positive equity is very high.

The OA will probably want to sell his share of the house

Quote:
His wife will have the option to purchase the Official Assignee’s interest in the family home for € 10,000
It's not at all clear that the wife has the right to buy the OA's interest. It does seem to be the OA's policy to sell it for €10,000 which is good news.

He will probably give the wife plenty of time to raise the necessary finance.

The OA will allow the husband reasonable accommodation expenses in bankruptcy so he can contribute to the mortgage.

If the wife continues paying the mortgage in full, the lender won't take any action to repossess the property.
Click to expand...
 
It sure is. The lady is in her early 60's and the house is worth circa. €500,000.
This could be a problem!
Thanks
 
Why is it a problem?

The guy is bankrupt, so his assets should be used to pay his creditors.

His wife will not be bankrupt and will have €250,000 available to buy or rent a house.

If he has not yet gone bankrupt, they should consider selling it now in an agreed and controlled manner to maximise the outcome.

Or could they use the €250k to come to an arrangement with creditors to avoid actual bankruptcy?

I presume that she never signed a guarantee of any sort for his loans?
 
Ye old developer comes to mind with Commercials scenario. Neat trick there was to put all assets into wife's name long before bankruptcy loomed.
 
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