During the real-estate boom which preceded these tough economic times men and women in the united kingdom started to dip their toes in the real estate market in the expectation of increasing equity over a period of several years in the hope and expectation that this probably would provide them with a pretty good profit on their money. Buy a property at a reasonable price, let it out for a number of years with the rental money taking care of the mortgage repayments and then sell it on, pocketing the profits. As a result the boom widened to what came to be labeled as the ‘Buy to Let’ sector. The idea was simple enough. An individual or a couple with a good disposable income invest in a property and let it out to tenants. Home mortgages of up to 100% were easy to obtain and furthermore rents were buoyant. In reality the rental income was expected to more than cover the monthly mortgage payments. The property was expected to increase in value with each coming year and in time the sale of the property would be likely to provide a great little profit, even considering capital gains tax. And why stop at one property? If the idea worked with one property, why not go for two, six, twenty, a hundred or more properties?
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.
Due to the fact selling the properties would cause shortfalls debtors found that their options were restricted to petitioning for Bankruptcy (BCY) or entering into an Individual Voluntary Arrangement (IVA). Choosing the right solution to opt for relied for the most part on each individual’s circumstances. The most crucial issue to be looked at in an IVA is the disposition of the creditors and in BCY the attitude of the Official Receiver and/or of the Trustee.
Buy to Let in Bankruptcy The bankrupt’s property 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 - deemed ‘de minimis’ - can usually be bought back from the trustee for a nominal sum. It is not entirely uncommon for the family of a bankrupt to buy back such a property on payment of 1 plus the official receiver’s costs of 211.
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.
Looking for reliable bankruptcy advice? Get exclusive inside info on how and where to find the best now in our guide to all you need to know about Debt advice.
If you would like to make a comment, please fill out the form below.
