Protecting the jointly owned home from a Trustee in Bankruptcy
When an individual is made bankrupt and is the joint owner of a property which he or she occupies with a spouse or partner, the trustee in bankruptcy will often assert a claim against the property. The usual starting point is that joint owners hold the property on a 50:50 basis and so 50% of the equity in the property will pass to the trustee. However, it is important for the non-bankrupt owner to consider whether there is anything that can be done to reduce the trustee’s share below 50%.
A key question to consider is whether the principle of the “equity of exoneration” applies.
In some cases, a declaration of trust may have been made when the property was purchased which specifies the share which each person has in the property. As a starting point, check the transfer document (which can be obtained from the Land Registry, the solicitors who acted on the purchase or the mortgage lender) and if that does not specify that they hold the property as tenants in common in equal shares or set out details of the shares in which it is held, check with the solicitor who acted on the purchase whether a separate declaration of trust was made.
If there is no declaration of trust, but the individuals’ contributions to the purchase price differed, it may be possible for the person who paid more at the outset to claim the difference out of the equity before it is split 50:50. This is especially common with second marriages where one party, usually the wife, has a large chunk of equity from a previous home, but the other does not.
Consideration should also be given as to whether the equity of exoneration applies. This doctrine operates to protect one owner where the other takes equity out of the property for his or her sole benefit and is of particular relevance where the bankruptcy follows the failure of the business of one of the owners.
Effectively, where a property belonging to two people is mortgaged or charged and the proceeds of the mortgage are used for the sole benefit of one of those people, for example for injection into a business vehicle such as a limited liability company, there is a presumption that the amount owing to the secured lender is to be discharged from that person’s share of the equity in the property.
Other points to bear in mind when negotiating with a trustee include early redemption penalties, the impact on price of a forced sale, agency fees on a sale, the costs a trustee would incur in going to court to force a sale and the length of time that it will take to get assistance from the court and then sell a property without co-operation from its occupants.
Mr and Mrs Jones (both previously married) purchase a house together for £300,000 using £100,000 from the sale of her previous home as a deposit and raise the balance through a mortgage. They buy the house in joint names and the mortgage is also in joint names and paid from their household income. No declaration of trust is made and they hold the house as joint tenants.
Three years later, Mr Jones decides to buy the company he works for from the current owner who is retiring. The purchase price is £75,000 which he raises by remortgaging the house. Mrs Jones has no involvement in the company.
Two years after that, the company fails and is put into liquidation. Mr Jones is made bankrupt because he is unable to settle his liabilities under the director’s guarantees he gave to the bank for the company’s borrowing.
His trustee in bankruptcy asserts a claim over 50% of the equity in the house which is now valued at £400,000 with a mortgage of £280,000 still outstanding. Initially it seems the trustee is entitled to £60,000 and will sell the property unless Mrs Jones pays that sum to acquire his interest. Mrs Jones claims credit for her initial contribution of £100,000 and claims that she is entitled to the equity of exoneration for a further £75,000 meaning that after her initial share has been taken out of the equity, there is nothing for them to split 50:50.
If her arguments were to succeed at court, the trustee would be left with nothing and could potentially face a hefty costs bill. A negotiated settlement, or even the waiver by the trustee of any interest in the property, is suddenly a lot more achievable.