nortons recovery

Property Interest Cases - New Protocol for Insolvency Practitioners

The recent boom in property prices has created a problem for individuals who were made bankrupt some years ago, but retained their interest in their family home. What is the problem?

During the last recession large numbers of individuals were made bankrupt. Often they owned their home, but the property crash meant that there was no equity, and often there was negative equity. This meant that in most cases the Official Receiver or Trustee in Bankruptcy took no action to deal with the property. Provided the individual was able to continue to pay their mortgage they were able to remain in the property. The individual would have been discharged from bankruptcy automatically after three years and will by now have put the painful experience behind them.

Unfortunately this is not the end of the matter. Whilst the individual may have been discharged from bankruptcy, any asset which they owned at the time they were made bankrupt remains vested in their bankruptcy estate. With property prices continuing to rise there is now considerable equity in the debtor's family home where none existed at the time of their bankruptcy.

There are a very large number of such cases which currently are administered by the Insolvency Service's Protracted Realisation Unit ("PRU"). The PRU reviews cases, establishes asset values and seeks the appointment of an Insolvency Practitioner Trustee by the Secretary of State from a rota of practitioners who have expressed interest in undertaking this work.

What happens in these cases?

I have been appointed on a number of such cases, sometimes where the individual was made bankrupt more than ten years ago. It is my task to contact the individual to tell them that I am obliged to realise the value of the property. Even though they may have been discharged from bankruptcy many years ago I am obliged to use the current value of the property in determining how much I must realise from the property.

This of course is a shock to the individual concerned. They were often badly advised about how to deal with their property when they were made bankrupt, but I think we do need to try and remember the climate of the time. I can recall advising a number of individuals who had little choice but to petition for their own bankruptcy. I explained about the implications for their homes if values increased, but that prospect seemed to be so remote at that time that I suspect most people took little notice.

There has been much criticism of the inconsistent approach adopted by Insolvency Practitioners in dealing with such cases. Some take a flexible approach in agreeing to sell or transfer the interest in the property, allowing significant discounts to take account of the time which has elapsed since the original bankruptcy and the fact that most creditors will have written off their debt many years ago and often have disappeared altogether. Others take a much harder line.

What about the changes introduced by The Enterprise Act?

The personal insolvency provisions of The Enterprise Act 2002 came into force on 1 April 2004. One of the provisions is that a Trustee in Bankruptcy must deal with a bankrupt's family home within three years of the date of the Bankruptcy Order. The Trustee must either dispose of the interest or obtain a charging order within the three year time limit. If he obtains a charging order then the value of the bankrupt's interest in the estate will be fixed as at the date of the charging order.

However this does not mean that the family home of individuals made bankrupt more than three years ago is now excluded from their estate. There is a transitional period of three years from the enactment of the legislation in which properties in existing cases must be dealt with.

This has now created a problem for the PRU which reportedly still has many thousands of cases on its shelves where the asset is a family home. Unless these cases are passed out to Insolvency Practitioners within three years of 1 April 2004 then the property will revest in the individual. The PRU has therefore established a new protocol for practitioners dealing with such cases to try and speed up the process.

What is the new protocol?

The protocol deals with how the property interests are verified and valued. This is to be dealt with now by the practitioner at their expense rather than the PRU. The protocol also sets out guidelines about how practitioners must deal with the property and the individual. These include the following:

It is recognised that this is traumatic event for the debtor and the practitioner must ensure that dealings with him or her are conducted with care and compassion.

The practitioner should not apply to the courts for repossession where the equity is less than £5,000.

Every attempt must be made to settle with the debtor on advantageous terms, which would include allowing the debtor and his or her family to pay the equity to the Trustee over a reasonable period of time.

The practitioner must arrange with the debtor a reasonable timetable to mitigate feelings of pressure.

The Insolvency Service has drafted a letter for practitioners to send to debtors upon their appointment as Trustee in order to try and ensure a more consistent approach. The letter includes a suggestion that they contact the Bankruptcy Association for advice. This is an independent organisation which represents the interest of people who are or likely to become bankrupt.

What can we expect in the next two or three years?

There will be a very large number of cases passed out to Insolvency Practitioners as the PRU clears its shelves. Consequently more and more individuals are going to be faced with the prospect of losing their home, many years after their debts have in effect been written off.

The new protocol should make the process a little less traumatic and should give debtors and their advisers the opportunity to drive a harder bargain when agreeing how much to pay to the Trustee and under what terms.