Landlords and Bankruptcy
All through the property boom which preceded the current recession a lot of people throughout the uk began to dip their toes in the property market in the expectation of growing equity over a period of five to ten years in the hope and expectation that this most likely give them a first-rate gain on their funds. Acquire a house at an acceptable cost, let it out for a couple of years with the lease income taking care of the mortgage loan and then dispose of it on, pocketing the gains. As a consequence the boom extended to what became called the 'Buy to Let' sector. The concept was simple enough. A person or a couple with a decent disposable earnings buy a house and let it out to renters. Home loans of up to 100% were easy to come by and furthermore rents were buoyant. In practice the rental income was anticipated to more than cover the monthly home loan payments. The house was expected to add to in price over time and in time the sale of the house would produce a decent little gain, even allowing for capital gains tax. And why stop at one house? If the approach worked with one house, why not choose two, six, twenty, a hundred or even more houses?
And then the bubble burst. The continuous increase in property values slowed down and eventually began to go the other way as property sales volumes and prices tumbled. The demand for rental properties began to reduce and rental income began to fall. Suddenly those who entered the 'Buy to Let' sector found that they were unable to reverse the process easily. As demand for property fell so did prices. And so did rental incomes. The mortgage payments on some properties began to exceed the rental income. Letting sometimes became impossible. The term negative equity re-entered the vocabulary - in truth, it had never gone away. Because selling properties at a loss was an unattractive option, people held on to their 'Buy to Let' properties for too long. Instead of the hoped for recovery in the housing market, things got worse. As a result many such investors found that they were insolvent. Their disposable income was insufficient to bridge the gap between their (multiple) mortgage payments and their rental income. Mortgage payments fell into arrears and they began to seek solutions for their financial difficulties.
Having considered all of their options including entering into Individual Voluntary Arrangements (IVAs) and given that selling the properties would lead to shortfalls, many debtors petitioned for their own Bankruptcy (BCY) or one of their creditors so petitioned. They found that a crucial factor in their BCY would be the approach of the Official Receiver and/or of the Trustee in BCY.
Buy to Let in Bankruptcy: The bankrupt's estate vests in the trustee immediately on his appointment taking effect or in the case of the official receiver, on his becoming trustee. The trustee can disclaim any onerous property and any property in significant negative equity would be regarded as onerous property.
Property with equity of up to 1,000 - looked at as de minimis - can be purchased back from the trustee for a moderate amount of money. It's not at all out of the ordinary for the family of a bankrupt to acquire such a property on payment of 1 as well in addition to the official receiver's costs of 211. A recent change in policy by the Insolvency Service ensures that this buy back will in most cases not now happen until two years and three months have elapsed since the bankruptcy order was created.
If the equity in the property is in the range of 1,000 to 5,000 then the trustee may attempt to register a charge on the property rather than endeavoring to realise this equity by having the property sold, because of the risk that the sales price may well not achieve market value and that the equity realized might not cover the cost of sales.
If the equity in the property exceeds 5,000, the trustee may look to sell off the property and to realize the equity for the benefit of creditors and to pay the costs of bankruptcy. The bankruptcy laws deal in great detail with the rights and duties of the trustee and of the bankrupt and with the rights of other parties such as the bankrupt's family and of creditors.
Where a bankrupt owns one or more 'Buy to Let' properties it appears that there has been a relatively recent change in the attitude of some trustees to the treatment of such properties. Historically where there was little or no equity in such a property, trustees allowed the bankrupt's family to 'buy back' the property and allowed the bankrupt to manage the letting of the property and the servicing of the mortgage. Any surplus income thus generated would constitute part of the bankrupt's disposable income and be subject to an income payments order. Thus the trustee would receive payments from the bankrupt for up to three years.
More recently, it appears that some trustees seek to seize control of such 'Buy to Let' properties and to assume all responsibility for them: receive all rental income; pay the mortgage and all associated insurance & maintenance costs; deal with all letting and tenant issues and take all the day to day decisions relating to the properties. Should the properties go into significant positive equity in the first three years of the bankruptcy, the trustee would also be in a position to realize the equity before the term expires in which the property re-vests in the bankrupt. The motivation for this apparent change in approach by trustees is unclear unless they expect to improve the returns for creditors by taking such action. Should you become bankrupt and the trustee is intending to seize control of your 'Buy to Let' properties, you should seek to obtain legal advice on this matter.
And then the bubble burst. The continuous increase in property values slowed down and eventually began to go the other way as property sales volumes and prices tumbled. The demand for rental properties began to reduce and rental income began to fall. Suddenly those who entered the 'Buy to Let' sector found that they were unable to reverse the process easily. As demand for property fell so did prices. And so did rental incomes. The mortgage payments on some properties began to exceed the rental income. Letting sometimes became impossible. The term negative equity re-entered the vocabulary - in truth, it had never gone away. Because selling properties at a loss was an unattractive option, people held on to their 'Buy to Let' properties for too long. Instead of the hoped for recovery in the housing market, things got worse. As a result many such investors found that they were insolvent. Their disposable income was insufficient to bridge the gap between their (multiple) mortgage payments and their rental income. Mortgage payments fell into arrears and they began to seek solutions for their financial difficulties.
Having considered all of their options including entering into Individual Voluntary Arrangements (IVAs) and given that selling the properties would lead to shortfalls, many debtors petitioned for their own Bankruptcy (BCY) or one of their creditors so petitioned. They found that a crucial factor in their BCY would be the approach of the Official Receiver and/or of the Trustee in BCY.
Buy to Let in Bankruptcy: The bankrupt's estate vests in the trustee immediately on his appointment taking effect or in the case of the official receiver, on his becoming trustee. The trustee can disclaim any onerous property and any property in significant negative equity would be regarded as onerous property.
Property with equity of up to 1,000 - looked at as de minimis - can be purchased back from the trustee for a moderate amount of money. It's not at all out of the ordinary for the family of a bankrupt to acquire such a property on payment of 1 as well in addition to the official receiver's costs of 211. A recent change in policy by the Insolvency Service ensures that this buy back will in most cases not now happen until two years and three months have elapsed since the bankruptcy order was created.
If the equity in the property is in the range of 1,000 to 5,000 then the trustee may attempt to register a charge on the property rather than endeavoring to realise this equity by having the property sold, because of the risk that the sales price may well not achieve market value and that the equity realized might not cover the cost of sales.
If the equity in the property exceeds 5,000, the trustee may look to sell off the property and to realize the equity for the benefit of creditors and to pay the costs of bankruptcy. The bankruptcy laws deal in great detail with the rights and duties of the trustee and of the bankrupt and with the rights of other parties such as the bankrupt's family and of creditors.
Where a bankrupt owns one or more 'Buy to Let' properties it appears that there has been a relatively recent change in the attitude of some trustees to the treatment of such properties. Historically where there was little or no equity in such a property, trustees allowed the bankrupt's family to 'buy back' the property and allowed the bankrupt to manage the letting of the property and the servicing of the mortgage. Any surplus income thus generated would constitute part of the bankrupt's disposable income and be subject to an income payments order. Thus the trustee would receive payments from the bankrupt for up to three years.
More recently, it appears that some trustees seek to seize control of such 'Buy to Let' properties and to assume all responsibility for them: receive all rental income; pay the mortgage and all associated insurance & maintenance costs; deal with all letting and tenant issues and take all the day to day decisions relating to the properties. Should the properties go into significant positive equity in the first three years of the bankruptcy, the trustee would also be in a position to realize the equity before the term expires in which the property re-vests in the bankrupt. The motivation for this apparent change in approach by trustees is unclear unless they expect to improve the returns for creditors by taking such action. Should you become bankrupt and the trustee is intending to seize control of your 'Buy to Let' properties, you should seek to obtain legal advice on this matter.
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