Member Article

Bankruptcy and the Matrimonial Home ? the ?Use it or Lose it? Rule

With Watson Burton LLP Law Firm

The effect of a bankruptcy order is to deprive the bankrupt of ownership of his property, which vests in the trustee in bankruptcy as from the date of the order. The bankrupt’s interest in the family home is usually the largest asset in the bankrupt’s estate, and the trustee will often wish to sell this in order to satisfy the bankrupt’s debts. This clearly affects not only the bankrupt, but also the other members of the bankrupt’s family, and, as such, the Insolvency Act 1986 contains various provisions designed to provide a degree of protection to the bankrupt and his family in these circumstances.

Section 283A of the Act provides that the trustee in bankruptcy must deal with the bankrupt’s matrimonial home within three years of the date of the bankruptcy order. This “three-year rule” applies to dwelling houses which, at the date on which the bankruptcy order was made, were the sole or principal residences of:

• the bankrupt;
• the bankrupt’s spouse or civil partner (where jointly owned with the bankrupt); or
• a former spouse or civil partner of the bankrupt (where jointly owned with the bankrupt)

It is, therefore, possible that the three-year rule may apply to more than one property where, for example, the bankrupt resides at one property and the bankrupt’s spouse/former spouse or civil partner/former civil partner resides at another.

The property will re-vest in the bankrupt at the expiration of the three-year period, unless the trustee:

• realises the interest, i.e. sells the property;
• applies for an order for sale or possession in respect of the property;
• applies for a charging order over the property to the value of the bankrupt’s interest; or
• enters into an agreement with the bankrupt regarding the interest

The trustee can apply to the court to extend the three-year period. However, where no such extension is obtained, and the trustee fails to deal with the property as provided for above within the three-year period, and the proprietary interest re-vests in the bankrupt as a result, a trustee may be faced with a personal claim against him for negligence by the creditors should the estate in bankruptcy suffer loss.

It is therefore crucial that both trustees in bankruptcy and bankrupts themselves are aware of the implications of the three-year rule, as the rule effectively represents a limitation period within which the bankrupt’s property must be dealt with by the trustee.

If you have any queries in relation to this article, or any other insolvency matter, please contact Stephen McLellan at Watson Burton LLP Law Firm by emailing stephen.mclellan@watsonburton.com or telephone 0191 244 4226.

This was posted in Bdaily's Members' News section by Ruth Mitchell .