What happens the family home in a bankruptcy?

FIRST OPTION – Bank relying on its security and remaining outside the bankruptcy

A bank may rely on its security by:

  • Selling the property where mortgage is not being paid, or
  • Ignoring technical mortgage default on adjudication of bankruptcy under mortgage deed and allowing the borrowers to pay mortgage on agreed terms, so no real default occurs.
Bank sells property where mortgage is not being paid

A bank may avail of this option where its security when realised is more than sufficient to discharge the loan principal and interest due and costs of realisation. It should confirm in writing to the Official Assignee that it is relying on its security by selling the property and undertake to provide any balance of proceeds remaining after such deductions to the Official Assignee, for distribution to unsecured creditors in bankruptcy. In certain cases (e.g. where the bank’s charge is an “all monies” type charge) the bank may be able to retain any surplus arising from the sale and set off against any other unpaid lending.

A bank staying outside and not claiming in the bankruptcy is entitled to be paid principal and interest up to date of redemption (sale of asset), in accordance with the terms of and at rate provided for in, the charging document.

Allowing borrowers to pay mortgage on agreed terms, so no default occurs

Mortgage deeds generally provide inter alia that an act of default will occur where a borrower is adjudicated bankrupt and some provide that a default occurs on the presentation of a bankruptcy petition against a borrower. In practice, even after adjudication, once the mortgage is being paid on terms acceptable to banks, banks have ignored such technical defaults.  However, the attitude of individual banks can vary.  In early 2017 one mainstream Irish bank commenced repossession proceedings against houses owned by discharged bankrupts, including those houses on which full mortgage payments were being made. It remains to be seen if the principle of Estoppel is a sufficient defence to defend such proceedings.

A bank’s mortgage is not affected by a bankruptcy, and  even after a debtors is discharged that the mortgage is still secured on the property.

The issue of allowing a bankrupt make mortgage payments is a complicated one and raises 3 separate issues:

  1. Is a borrower who goes into bankruptcy allowed to pay his mortgage post-bankruptcy?
  2. Should the Official Assignee not claim any income bankrupt has to make such payments, as part of his bankruptcy estate?
  3. What mortgage payments does the Official Assignee allow?
Is a borrower who goes into bankruptcy allowed to pay his mortgage post-bankruptcy?

The Bankruptcy Act 1988 provides that on adjudication, all then property of a bankrupt vests in the Official Assignee.

Whilst bankruptcy is a collective process in which all unsecured creditors (save for preferential creditors) share all unsecured bankruptcy assets equally amongst them; there is no specific provision in the Act that prevents a bankrupt paying any off any of his creditors, once he or someone else, does so with non-bankruptcy assets e.g. monies received from friends, family or after acquired funds not claimed by the Official Assignee. It is not unknown for a bankrupt to apply such funds (including after acquired assets unclaimed by Official Assignee) to pay off a trade supplier who he needs supplies from to carry on his business, post adjudication. If the creditor has initially claimed in bankruptcy he withdraws his claim on payment by the bankrupt. Whilst these payments are clearly against the spirit of collective treatment of unsecured creditors under the Act, once bankruptcy assets are not used to make the payments concerned, no breach of the Act occurs.

Should the Official Assignee not claim any income the bankrupt has to make such payments, as part of his bankruptcy estate?

Only the Court can compel a bankrupt person to make a contribution towards his bankruptcy debts. Where the Official Assignee cannot reach an agreement on the contribution with the bankrupt towards his bankruptcy debts he has a right under current legislation to apply to Court pursuant to the Bankruptcy Act 1988 for an order compelling the bankrupt to make a contribution. Under the Act the Court is given power to direct a bankrupt to make payments having regard to the family responsibilities and personal situation of the bankrupt and the Court may on application of any interested person also vary such order, having regard to changes in the family responsibilities and personal situation of the bankrupt.

The Insolvency Service in accordance with its duty under S 9 (i) of Personal Insolvency Act 2012 following consultation with OA and other offices and organisations, has now published guidelines as to what constitutes a reasonable standard of living and reasonable living expenses under S 23 of said Act. Section 85D of the Bankruptcy Act 1988 (as inserted by section 157 of the Personal Insolvency Act 2012 repealing S 65), provides that a Court when making a bankruptcy payment order, may have regard to these guidelines and the Official Assignee may equally have regard to the guidelines, (when similarly having to assess net disposable income after paying reasonable living expenses) in agreeing income payment agreements with bankrupt persons.

What mortgage payments does the Official Assignee allow?

As stated above, the Official Assignee in his assessment of income payments from the bankrupt person, allows him deduct sufficient sums from his income to pay reasonable living expenses, the most substantial and most important deduction of which is for reasonable accommodation expenses i.e. his rental or mortgage payments. Applying the criteria set out in the Bankruptcy Act 1988 to have regard to the family responsibilities and personal situation of the bankrupt, the Official Assignee assesses the accommodation requirements of the bankrupt and his family and where the cost of the share of the mortgage payments paid by the bankrupt is not appropriate having regard to reasonable requirements of family, because for example the property is very substantial, the Official Assignee will either request his spouse to buy him out of his equity in property or if no equity, seek Court approval to have family reduce mortgage re-payments by moving to more modest accommodation and surrendering the property to the financial institution. Where guidelines are breached because a portion of debtor’s income required to service mortgage payments is higher than that specified in relevant guidelines for him and a family of its size and reasonable requirements, the family should move to more modest accommodation, with mortgage debt repayments within mortgage payment approved limits.

The Bankruptcy Court may make 1 year or 3 year income payment orders, before the discharge of the bankrupt. It is obviously in the interests of bankrupts to either agree income payment agreements with the OA or consent to income payment orders, at earliest stage of bankruptcy to ensure payment period expires at earliest possible date post discharge. The orders may be sought by OA and can be varied on application of OA or the bankrupt. Section 85D (4) provides that, “In making an order – – the Court shall have regard to the reasonable living expenses of the bankrupt and his or her dependents and the Court may also have regard to any guidelines on reasonable living expenses issued by the Insolvency Service under the Personal Insolvency Act 2012 or by the OA.” The OA and the Court will adopt the ISI Guidelines.

SECOND OPTION – Abandon its security and claim in the bankruptcy for full debt.

If the financial institution wishes to avail of the second option, it should confirm this in writing to the Official Assignee and remove any mortgages off the title to property, to facilitate sale thereof by the Official Assignee. The Official Assignee will sell the property and after costs of realisation, Court fees and preferential debts have been paid, distribute proceeds of sale of assets of estate (including property sale proceeds) equally amongst all unsecured creditors (including former bank). Rarely do banks exercise this option and will only do so where a prior bank debt is greater than value of property and they have no security therein.

THIRD OPTION – Realise the asset or value its security held and then claim in the bankruptcy for any balance owed in excess of the net proceeds received or valuation.

If the bank wishes to avail of the third option, it should confirm this in writing to the Official Assignee. It should state the amount owed at the date of adjudication, realise the asset or formally value any security and confirm it wishes to claim for any balance owed in excess of the net proceeds received or valuation furnished. It should also provide necessary copy mortgage, statements, valuations, and other relevant proofs to vouch such claims and valuations. It should subsequently submit claim in respect of its unsecured debt.

This is the option that most banks would choose if banks did not want to remove borrowers from family homes but instead wished to release them from unaffordable mortgage payments having regard to their means, by reducing mortgage debt through debt forgiveness of the shortfall in their security, which shortfall would rank as an unsecured debt in respect of which they could claim in the bankruptcy. They would rank equally with other unsecured creditors and be entitled to share equally with them in realisation of any other assets in estate; after payment of costs, fees and expenses and any pre-preferential and preferential debts in estate. By valuing their security and claiming in bankruptcy they are limiting their claim outside bankruptcy on foot of continuing mortgage deed obligations to value placed on security, as valuation amendments subsequently, are only allowed where they can prove initial valuation was made bona fide on a mistaken estimate, which rules out any possibility of them availing of appreciation on value, post valuation. If property is subsequently sold by bank the realisation value is substituted for actual valuation and dividend paid or due is amended accordingly, which would mean refunding of any surplus amount received to estate.

Whilst a bank has the choice of claiming in bankruptcy in respect of shortfall in his security without having to realise the asset; the borrower has no such choice and he can only have the unsecured portion of his debt brought into bankruptcy where:

  • the bank values its security and claims in bankruptcy or
  • pre-bankruptcy he surrenders property to financial institution or
  • post-bankruptcy the Official Assignee surrenders property to financial institution or
  • Bank appoints a receiver and bank values its security and claims in bankruptcy.

However, if borrower simply stops paying his mortgage in reality he will force the bank to seek surrender of his share held by Official Assignee and will seek an order for possession against spouse (if any).

Sale of Family Home by Official Assignee – S 61(4) of Bankruptcy Act 1988

  1. Interest of bankrupt in family home (like all other property of bankrupt) automatically vests in Official Assignee on adjudication, which severs a joint tenancy and converts it by operation of law into a tenancy in common.
  2. A vesting cert is filed with Property Registration Authority, which registers the interest of Official Assignee in property.
  3. The Official Assignee has full authority to sell or surrender to a bank any property of a bankrupt, other than his family home.
  4. Official Assignee under S 61(4) of Bankruptcy Act must apply to Court to sell the property and Court can order postponement of sale, having regard to the interests of the creditors and of the spouse and dependents of the bankrupt as well as to all of the circumstances of the case. Any disposition made without such sanction is void.
  5. Spouse can buy out beneficial interest of debtor spouse, once bank agrees to other spouse taking over full debt and release of debtor spouse. Where spouse proves she alone has being paying mortgage for a period, Official Assignee will credit her with such payments and reduce accordingly his interest in property, as indeed he will in relation to Judgment Mortgages registered against bankrupt alone on title Folio, which are a prior charges against his half interest only. If there is no equity in the family home there is no immediate interest for the Official Assignee to sell. However, if the spouse or civil partner wishes to purchase the interest of the Official Assignee, the Official Assignee in determining the purchase price will have regard to the value of the property, the amount of negative equity, how long the property may remain in negative equity and any other relevant matter. The Official Assignee indicated in an RTE interview in late 2013 that he would dispose of his interest in a home with negative equity for a sum of €5,000 + his legal costs. The Official Assignee may accept instalments from a spouse over a period of 12/24 months.
  6. Official Assignee is able to claim value in excess of all debts and costs of bankruptcy to pay interest to creditors, as creditors are entitled to interest, if there are enough assets in the bankruptcy estate for all such payments.

Mortgage to Rent

The Official Assignee will participate in a suitable MTR scheme.

In certain circumstances it may be possible to develop strategies to protect the family home. For further information please contact Jim Stafford or Tom Murray on 01 661 4066 or by email: jim.stafford@frielstafford.ie, tom.murray@frielstafford.ie