The Enterprise Act 2002 – Bankruptcy Orders and the Family Home

The economic recession of the late 1980s and early 1990s resulted in an unprecedented number of individuals being made bankrupt. Upon the making of a bankruptcy order, the bankrupt’s assets vested in a trustee in bankruptcy (often the Official Receiver).

Owing to unfavourable market conditions, it was common for the bankrupt’s principal asset, the family home, to be in negative equity. The trustee might not, therefore, seek immediately to force a sale of the property – the bankrupt and his family often remained in occupation.

The bankrupt, wrongly assuming that he owned his home and happily watching the equity increase, as house prices soared, continued to make mortgage payments.

As favourable market conditions returned, so did the trustee in bankruptcy, (only now) seeking to force a, sale of the family home to satisfy the principal debts of the bankruptcy, together with statutory interest and an often sizeable bill for the trustee’s costs and expenses.

As a consequence of accruing charges, fees and interest, it was common for a bankrupt’s indebtedness to double and even, in many cases, to exceed the equity increase.

The Enterprise Act 2002 imposed a timeframe on trustees in bankruptcy, in relation to the realisation of bankrupts’ assets.

Where, since 1st April 2004, a bankruptcy order is made in respect of a bankrupt’s estate which includes a dwelling house, the principal residence of the bankrupt or his spouse, the trustee has three years to ‘take action’ to realise the asset. If, after three years, the trustee has failed to ‘take action,’ the asset will revert to the bankrupt.

Where a bankruptcy order was made before 1st April 2004, the trustee must ‘take action’ before April 1st 2007.

Steps which may constitute ‘taking action’ include selling the property, applying for an order for sale, applying for an order for possession or applying for a charging order against the property in question.

A bankrupt may wish, in order to avoid losing the family home in such circumstances, to consider a bankruptcy annulment application – for a successful applicant it is as if the bankruptcy order had never been made.

Preparation of such an application will often include negotiation with creditors who may, in the light of recent case law, agree to accept a reduced sum in relation to interest, potentially reducing the bankrupt’s indebtedness by thousands of pounds.