The subject was recently raised by the Insolvency Practices Council, which raised its concern during recent consultation on a new insolvency bill and asked for guidance on the matter.
The issue was left unresolved after the government decided not to proceed with earlier proposals to allow bankrupts to retain a portion of the equity in their homes after experts said it was unworkable.
Recently, the issue has been highlighted by the bankruptcy of disgraced cabinet minister Jonathan Aitken, whose family was allowed to keep part of the proceeds of the sale of his home.
John Alexander, national head of corporate recovery at PKF, said the home proposal was based on US legislation, where it is exploited. Most bankruptcies in the US are business-related and not caused by consumer debt, as in the UK.
He added: ‘In the US, it is open to a lot of abuse.’ He cited states like Florida or Texas, where bankrupts often buy expensive homes in order to get more value for money.
Many believe there ought to be legislation in the UK to avoid abuse of home ownership by trustees. R3 believes one of the best way to deal with the matter is to only allow trustees to sell a bankrupt’s home during a specified period of time.
After that time a value would be independently determined to stop creditors from ‘coordinating’ their claims on the property with rises in the housing market.
Another proposal is that, if a trustee has not realised the property within a specific period, any interested party would have the right to buy the bankrupt’s interest at a valuation.
At the moment, the law on the matter clearly states that the trustees are responsible for dealing with a bankrupt’s home in a manner which benefits creditors. The home is generally sold, along with other assets belonging to the bankrupt, in order to pay debts.
But there is no clear indication as to when and how the trustee sells the property, which has led to practices viewed by some as unfair. Under the current laws, there is no time limit in which the property must be sold. Trustees can therefore sell a bankrupt’s home years after the individual has been discharged.
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