ISI Case study - bankrupt's wife takes over the home in negative equity

[Brendan Burgess]

The Insolvency Service has issued [broken link removed] I attach the one for Leo who has negative equity but retains the family home

Net income| €3,625
Reasonable living expenses| €2,040
Available for creditors|€1,585

Family home

value|€150k
Mortgage|€260k
Negative equity |€110k
Full monthly repayment| €1,475
Interest on Mortgage |€1,000

Unsecured debts: €88,000

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.

Unsecured debts
There will be a total amount of € 4,110 (See Appendix A) available for unsecured creditors as a final distribution of the estate, and Leo has no repayment obligation for the remaining unsecured debt. Leo will be automatically discharged from bankruptcy after three years once he has fully cooperated with the Official Assignee.

 

[Brendan Burgess]

This seems an extaordinary use of bankruptcy.

Mrs Leo takes over the house and the mortgage. She was of course, jointly and severally liable for the full mortgage anyway.

Leo's unsecured debts have been wiped out.

Over the 5 years of the Bankruptcy Payments Order, Leo has been paying the full mortgage repayment, which includes around €500 a month of capital repayments. So after 5 years he will have paid down €30,000 of the mortgage on his wife's behalf.

 

[Bronte]

Why is the family home valued at 5K when there is no equity.

If Nora were to purchase it, how does the transfer of the property into her name work, and what happens the mortgage, does it stay in joint names.

Would they both be better off as a couple without the house, particulary if they could rent for a lot less than the mortgage payment.

Where is the admin cost to Nora of 2.5K coming from?

There's a bit of nonsense there about the furniture. Leo has to take the value of the car and add it to the value of the furniture and decide what is to sold to reduce the figure to 5K. Let's say he picks the furniture, is the OA actually going to go into a house and take out 1.5K of furniture. It doesn't make sense, because presumably Nora owns half of everything. In any case it's a nonsense that you'd sell second hand furniture from a family home in which a family are living.

 

[Brendan Burgess]

I have ignored the minor stuff about the furniture and the car to try to get my head around the bigger picture.


Would they be better off both going bankrupt and getting rid of the house?
Bronte's point.

She should go bankrupt too and get rid of the house and the €110k of negative equity.

They would have a clean start after 5 years.

Could they both go bankrupt and keep the house and reduce the mortgage?
I would propose to the lender that the mortgage be reduced to say €170k and they both go bankrupt.

Then the house vests in the Official Assignee. Not sure if this works.

The mortgage lender loves this bankruptcy
The unsecured creditors get wiped which makes Leo's able to pay his full interest and capital repayments.

Could this not have been achieved through a voluntary restructuring?
This would be a perfect case for a split mortgage.

Or the mortgage lender could agree to interest only for 5 years, so that Leo could pay €30k to his unsecured creditors. The Central Bank waterfall would achieve this or something like this.

The unsecured creditors would probably veto a Debt Settlement Arrangement
Leo could apply for a DSA which would exclude the mortgage debt. But as there would be nothing to pay the unsecured creditors, they may well veto that.

Should they sell the family home and then look for a Debt Settlement Arrangement?
They could consider selling the home with the agreement of the lender to support a DSA after the shortfall is converted to unsecured debt.

They could have a three year DSA. They would be debt free and not have the "stigma" of bankruptcy.

 

[Brendan Burgess]

Why is the family home valued at 5K when there is no equity.



Where is the admin cost to Nora of 2.5K coming from?

So Nora pays the Official Assignee €7,500 to take over €110k of negative equity?

Presumably she would decline his generous offer.

What happens then?

The OA just disclaims his interest in the home and the mortgage.

Or does he continue to own half the equity?

 

[Bronte]

So Nora pays the Official Assignee €7,500 to take over €110k of negative equity?

Presumably she would decline his generous offer.

What happens then?

The OA just disclaims his interest in the home and the mortgage.

Or does he continue to own half the equity?

But there is no equity, so the OA doesn't own anything? Half a house in NE is what vests in the OA. Nora doesn't have to pay the OA anything, she's already fully liable for the morgage even if her husband is no longer liable. This is getting very complicated.

In realtion to the furniture, I realise you think it's a minor matter, but most people have furniture worth more than 1.5K, some living room suites are worth a few grand. It cannot be the case that this would have to be factored in and also it could mean you have to make a choice between selling them or the car. I see that in the second table the value of the furniture is halved, must be to reflect that Nora also owns half, but presumably Leo bought the furniture.

There is also a legal angle to this. Nora has paid zero deposit, and presumably zero mortgage, and works in the home. There is case law on this that means even if the property was in equity that she is not an owner of anything. A lot of people make the mistake of thinking because you are married that it gives you ownership rights. It's not true. But I do agree she is fully liable for the mortgage.

What's the solution for Nora, refuse to pay the OA the 7.5K, the husband continues to pay the mortgage, half if it is with the OA and the other half is with Nora, so what's the OA going to do then? In any case where is Nora to get 7.5K from.

I don't understand how the bank stays outside the bankruptcy. Does Leo have to pay the mortgage at all, could he just move somewhere else with Nora and rent. Leo now doesn't own the any part of the house apparently. And Nora is fully liable for the full mortgage, but she cannot pay it as she has no income. If he's tied to the house during the 3 years or 5 years. Can he decide in 3 years to move elsewhere leaving the bank with the house.