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Bankruptcy and the matrimonial home

June 11, 2009
The Relationship between Family and Bankruptcy Law

At first glance, there is no obvious link between the areas of bankruptcy law and family law; however, the two are definitely intertwined when it comes to establishing the beneficial ownership of the matrimonial home. The matrimonial home is an asset that is, understandably, of prime concern to anyone going through a divorce or bankruptcy. There are many examples of where a family lawyer might negotiate with a bankruptcy lawyer and vice versa; for example, where a matrimonial home is solely owned and, during divorce proceedings, the sole owner becomes subject to a bankruptcy order. In such cases the non bankrupt spouse may have an interest in the matrimonial home but will have to satisfy the Trustee in Bankruptcy and, ultimately the court, that she/he is entitled to that interest. One of the biggest issues for the Trustee and the non-bankrupt spouse is going to be how much that interest might be. This determines how much of the equity in the property will be paid to the Trustee. This will require the non-bankrupt spouse's interest to be quantified for which there are a number of possible outcomes and for which great care is required to achieve the fairest or most beneficial outcome for either party. In many cases this will lead to the non-bankrupt spouse staying in the property, while the trustee recovers his interest in the property for the bankrupt's creditors. If this is not possible the house may have to be sold. Establishing the Beneficial Interest There is a great deal of case law surrounding this area which requires careful unravelling. In essence, a beneficial interest can be established via a constructive or a resulting trust and the basic requirements of each are set out below. Please note that the principles apply equally to solely or jointly owned properties.

  • Initial Presumption - the initial presumption is that the property is held as per the proprietorship register. This presumption can be rebutted in the ways set out below.
  • Written Declaration of Trust - a written declaration of trust is conclusive unless there are grounds for it to be set aside (i.e. as a transaction at undervalue). The declaration must be in writing, although there is no requirement for it to be made by deed. The declaration contained on the Land Registry TR1 form is sufficient, even if it is not signed. The contributions of parties to the purchase price are irrelevant.
  • Express Constructive Trust - to establish an interest under an express constructive trust there must be an express agreement or common intention that the claimant has a beneficial interest and the claimant must have acted to his / her detriment. The share of the beneficial interest is governed by the agreement. If there is no agreement, the court will infer a share - usually 50% - where the parties are married and both made substantial contributions towards the purchase price.
  • Implied Constructive Trust - if there is no express agreement or common intention (see above), the court can infer an agreement or common intention. This usually occurs where there has been a direct contribution to the purchase price but some conduct may give rise to an interest under an implied constructive trust (such as contributions to the household expenditure if they allowed the other party to discharge the mortgage repayments) and some indirect contributions may also suffice (such as making payments into an account out of which the mortgage payments and household expenditure is paid). The share is calculated by the whole course of conduct of parties and, if the parties are married, the beneficial interest will usually be divided equally. If the parties are unmarried, the court will adopt a broad-brush mathematical approach
  • Resulting Trust - to establish an interest under a resulting trust there must be a direct contribution to the purchase price. Indirect contributions will not suffice. The share of the beneficial interest is calculated according to the contribution.
  • Once the beneficial interest has been established, the parties may then go through an equitable accounting exercise to account for any debits and credits not already considered. This does not affect the beneficial interests but does affect the amount ultimately payable from the net proceeds of sale. It includes factors such as occupation rent, improvements and capital mortgage payments. This is a general and simplistic overview of a complex area. For any insolvency enquiries, please contact Gavin Pickering on 01293 596976.

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