The effects of bankruptcy are invariably demoralising and can have wider, sometimes unexpected, results for other members of the family. In no other area can this be as distressing as the potential loss of the family home.

Between family partners, whether or not married, it is usual for the family home to be owned jointly. If one of those partners is declared bankrupt, then, even if the other is blameless in connection with their finances, the effects on that blameless partner and any children can be devastating.

The possible consequences of bankruptcy were starkly illustrated in a case which was recently heard in the High Court and the Court of Appeal. In brief, the circumstances were as follows:

  • B was a self-employed taxi driver. He failed to pay tax due and owed £51000
  • HMRC, the only creditor, issued a bankruptcy petition
  • B was declared bankrupt
  • B failed to pay the sum due. HMRC decided to enforce the bankruptcy order by realising assets owned by B
  • B’s main asset was his share in the house which he owned jointly with his wife
  • HMRC made an application to the court for an order for the sale of the house

Pausing there for a moment, it is worthwhile noting the law which applies when this situation arises. Under the Insolvency Act 1986, an application for the sale of a bankrupt’s home must be made within three years of the date of making the bankruptcy order. In this case, that time limit was complied with.

When the judge comes to consider whether or not to order a sale of the property, the law states that

“Unless the circumstances of the case are exceptional, the interests of the creditors outweigh all other considerations”

Returning to the circumstances:

  • B and his wife had a daughter who was aged 30
  • The court accepted that the daughter suffered from a number of very serious, debilitating physical conditions and had the mental age of a child aged eight. The child’s condition would never improve, nor would she be able to live independently.

The issue to be decided therefore was whether the circumstances relating to the ownership of the house, particularly regarding the health problems of the daughter were so 'exceptional' that they should override the interests of the creditors.

At the first hearing, the judge decided that the circumstances were indeed so exceptional that the sale of the house should be postponed until the daughter no longer lived at the house as her permanent residence.

HMRC obtained permission to appeal that decision and the case went to the Court of Appeal. The decision of that court was:

  • The original judge had been entitled, on the facts of the case, to decide that the circumstances were 'exceptional'
  • The original judge had, however, exceeded the ambit of reasonable discretion by postponing the sale for what could be a very long period
  • The Court of Appeal said that in cases of this sort, even when exceptional circumstances are found, it is still necessary for the court to examine “all the circumstances other than the needs of the bankrupt”
  • The other circumstances included the bankruptcy legislation which puts at its heart the object that the assets of the bankrupt should be realised within a reasonable time and paid to the creditors, usually within months and not years
  • The Court of Appeal also found that it was not unrealistic to expect that the share of the proceeds of sale belonging to the bankrupt’s wife could be retained by her and used to acquire alternative accommodation for her and the daughter

The importance of this case is to illustrate that where one of the partners to a marriage or partnership gets into financial difficulties and there is a risk of bankruptcy, the consequences can be serious for the innocent party, who may not even know about the problems. As soon as issues of this nature come to light, it is very important that the appropriate legal advice is taken.