Cheap Property Sale & Bankruptcy

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    Cheap Property Sale & Bankruptcy

    Here is the scenario:

    Mr Smith is in arrears with his mortgage, and the lenders are going to repossess the property in 10 days.

    Mr Brown appears on the scene and makes the following offer:-

    Property value: £160,000

    Mortgage £87,000.00
    Arrears £1,700.00
    24 Months Rent £17,400.00
    Solicitors Fees £1,000.00
    Other Fees £2,000.00

    OFFER £109,100.00

    So Mr Smith is saved from repossession and is able to stay in his house for two years with the rent paid up front. There is also an option to buy back the house at the end of year two- £120,000.

    If it was repossessed he would have no home and very little if any money from the sale of the property at auction.

    So here is the question:-

    Mr Smith also has unsecured debts of about £45,000 and is now a tenant. If he were to go bankrupt, how would the official receiver view the recently sold property?

    What are the consequences with a deal like this?

    #2
    Mr Brown is unlikely to be undertaking a work of charity on behalf of Mr Smith.

    Mr Smith would be giving away £51,000 equity (£160k-£109k) in the property.

    Even if Mr Smith has a buy back option a less than straightforward set up would be hoping that Mr Smith would be in a default situation or be unable to utilise the buy back option.

    If Mr Smith already has unsecured debts of £45,000 I'm uncertain how a receiver would regard the giving away of £51,000 property equity.

    Mr Smith would be well advised to seek professional help!!!!

    Mr Smith's advisor will also need full details of the proposed contract and when the mortgage was taken out to see how this relates to financial information provided to the Building Society at the time of application.
    Vic - wicked landlord
    Any advice or suggestions given in my posts are intended for guidance only and not a substitute for completing full searches on this forum, having regard to the advice of others, or seeking appropriate professional opinion.
    Without Plain English Codes of Practice and easy to complete Prescribed Forms the current law is too complex and is thus neither fair to good tenants nor good landlords.

    Comment


      #3
      Although I would unhesitatingly endorse Worldlife's advice above, I would query what action any receiver could take if the bancruptcy were to be declared after the sale of the property had taken place, particularly after it had been completed. An unsecured debt is exactly that and as, at the point of bankruptcy, the property was no longer an asset the receiver could not use its previously remaining equity to discharge any debts. Of course any debts SECURED on the property would be discharged as part of the sale/purchase process. Although the vendor could be criticised for throwing away such equity when he was aware he had unsecured debts outstanding, such a decision, made of his own free will, cannot be reversed in the future by some other official. After all, we all know of company directors who make wild decisions when their company is in trouble as they are in a make or break situation - and occasionally it works!

      P.P.
      Any information given in this post is based on my personal experience as a landlord, what I have learned from this and other boards and elsewhere. It is not to be relied on. Definitive advice is only available from a Solicitor or other appropriately qualified person.

      Comment


        #4
        Could a court take the view that a bankruptcy to be declared soon after disposing of a substantial asset would be a criminal bankruptcy?

        Comment


          #5
          Originally posted by P.Pilcher View Post
          Although I would unhesitatingly endorse Worldlife's advice above, I would query what action any receiver could take if the bancruptcy were to be declared after the sale of the property had taken place, particularly after it had been completed. An unsecured debt is exactly that and as, at the point of bankruptcy, the property was no longer an asset the receiver could not use its previously remaining equity to discharge any debts. Of course any debts SECURED on the property would be discharged as part of the sale/purchase process. Although the vendor could be criticised for throwing away such equity when he was aware he had unsecured debts outstanding, such a decision, made of his own free will, cannot be reversed in the future by some other official. After all, we all know of company directors who make wild decisions when their company is in trouble as they are in a make or break situation - and occasionally it works!

          P.P.
          Trustee in Bankruptcy (T) can re-open any gift or undervalue transaction (GUT) by debtor (D) if:
          a. GUT was within last two years; or
          b. GUT was within last five years, unless D can prove that he/she was solvent at time of GUT (AND for two years thereafter) AND did not become insolvent as a result of GUT; or
          c. D was defrauding creditors, in which case there is no time limit at all.

          However, a bona fide purchaser without notice of the GUT - i.e, someone innocently purchasing for full value from D's purchaser or a later successor- is fully protected.

          See Insolvency Act 1986 (esp. sections 339 to 342F and sections 423 to 425).
          JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
          1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
          2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
          3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
          4. *- Contact info: click on my name (blue-highlight link).

          Comment


            #6
            Thank you Jeffrey. Your professional comments based on my "common sense" opinions are once again much appreciated. Between us we may well, once again, show that "the law is an ass" before long - though not I feel in this instance!

            P.P.
            Any information given in this post is based on my personal experience as a landlord, what I have learned from this and other boards and elsewhere. It is not to be relied on. Definitive advice is only available from a Solicitor or other appropriately qualified person.

            Comment

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