Protecting the family home
For most of us, Christmas promises to be a happy time, secure in the family home, surrounded by loved ones. For the unfortunate, the notion of a family home will be a distant and fading memory. But in post-bubble Ireland today there is a third and growing category: those whose exposure to debt has left them in dire fear of losing the roof over their heads.
When it comes to insolvency and bankruptcy, the family home looms large. For creditors, it is often the only unencumbered asset which gives any prospect of meaningful recovery of sums due. For the debtor, the value of equity in the family home in monetary terms must be set against the hugely emotive prospect of losing that home.
But there is no way of leaving the family home outside insolvency negotiations, according to Jim Stafford of Friel Stafford, a personal insolvency specialist. The challenge is to make the best of things and the status of the family home needs to be evaluated like everything else.
“One of the major characteristics of individuals facing insolvency or personal bankruptcy is how they tend to focus on short term pressures and needs,” says Stafford. In fact, according to Stafford, these individuals need a 15-20 year business plan.
Those individuals facing bankruptcy need pragmatic advice and one key question is: “Can a bankrupt client who is 55 years old really afford a mortgage of €1m? That person may need to downtrade.”
Irish legislation is replete with protection of the family home, and this legislation is central in the new Personal Insolvency Bill which states:
“A Personal Insolvency Arrangement shall not provide for disposal of the debtor’s interest in the principal private residence unless firstly, the debtor has obtained independent legal advice in relation to such disposal or has declined to do so and, secondly, that all applicable provisions of the Family Home Protection Act 1976 or the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 are complied with.”
The protection of the family home in that legislation is plentiful. Section 5 of the Family Home Protection Act states:
“Where it appears to the Court, on the application of a spouse, that the other spouse is engaging in such conduct as may lead to the loss of any interest in the family home… the Court may make such order as it considers proper”
Section 5 was designed for dealing with the archetypal alcoholic gambling spouse. However, a pre-emptive transfer to protect the family home from creditors may be challenged under the Bankruptcy Act if the transfer was used to counter the consequences of a spouse who “gambled”, say, on property.
In fact, the family home is at the centre of all kinds of tactics to mitigate the effects of bankruptcy and insolvency – many perfectly legitimate.
Take the decision to go bankrupt. Bankruptcy does not necessarily protect the family home. But there may be an opportunity to protect the asset, taking advantage that prices may be close to bottom of market at this point, according to Stafford.
For example, in the case of a bankrupt individual, the Official Assignee will adopt a pragmatic position and may agree to sell the individual’s 50 per cent share of the house to the spouse. Often this is at a discount on market value (15 per cent is considered usual). If, say, bankruptcy declaration was delayed, the spouse might not be able to buy out the 50 per cent share of the house if market values increases in the meantime.
There are also tactics that can be applied in the area of separation and divorce.
A court approved Deed of Separation or Divorce which gives the spouse full ownership of the house is unlikely to be overturned. In this case the court makes a Property Adjustment Order and this is difficult to challenge. But couples have been known collude to obtain Property Adjustment Orders through sham arrangements and if collusion is proven, then the transfer can be set aside.
Another tactic used to protect the family home is to “take in the mother-in-law”.
When an individual is made bankrupt and there is equity in the family home, the Official Assignee has to make an application to Court for sale. An Order for sale will normally be granted but a stay may be put on it for many years if there are young children in the house, or if the bankrupt is looking after an infirm relative or someone with special needs.
The bankrupt may also sell the property to another family member and a sale at market value cannot be challenged. But what happens if nobody in the family has the money?
An option is to sell the property but retain a life interest. According to Stafford the capital acquisition tax (CAT) Schedules values the life interest of a 55 year old male at 65.98%. Therefore, that person could sell €100,000 of equity for €34,020. This tactic is, however, is open to challenge. Likewise, the equity could be sold for a loan note payable over 20 years (the Bank may garnishee the re-payments). This is also open to challenge.
In many cases potential and actual bankrupts have received loans from family members. Sometimes these family members may be repaid by accepting the home as payment.
But if the individual was insolvent at the time such a transaction is made then the transfer would be deemed a Fraudulent Preferential Payment. However, provided the individual was not adjudicated a bankrupt with 12 months of the transfer, the transfer would be valid (provided it was executed at market value).
Mortgaging the family home is another way to protect it from third party creditors. Most mortgages are for “all monies due”. Where this tactic is employed it is common for individuals to keep the mortgage topped up to prevent equity building up
Transfer of the family home to the spouse is the most common and obvious tactic. While this will certainly be challenged by creditors it at least it represents a negotiating chip. Following transfer it is common for the individual then to enter into an informal Personal Insolvency Arrangement or Individual Voluntary Arrangement in the UK and then use the spouse’s equity to do a deal.