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BRIEFING PAPER

Number 05271, 27 November 2019

Bankruptcy: assets that pass to the trustee

By Lorraine Conway

Inside: 1. Introduction 2. The bankrupt’s estate 3. Other assets that fall into the

bankrupt’s estate 4. What happens to the

bankrupt estate after discharge?

Number 05271, 27 November 2019 2

Contents Summary 3

1. Introduction 4 1.1 What is bankruptcy? 4 1.2 Function of the trustee in bankruptcy 4

2. The bankrupt’s estate 6 2.1 Definition 6 2.2 Assets disposed of prior to bankruptcy 7

Transactions at an undervalue 7 Transactions at a preference 8 Court orders: preferred or undervalued transactions 9

2.3 After-acquired property 9

3. Other assets that fall into the bankrupt’s estate 12 3.1 Surplus income 12 3.2 Pensions 12 3.3 Family home 15

4. What happens to the bankrupt estate after discharge? 17

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3 Bankruptcy: assets that pass to the trustee

Summary Bankruptcy and the sale of property is governed by the provisions of the Insolvency Act 1986 (IA 1986) (as amended), the Insolvency (England and Wales) Rules 2016, and the Enterprise Act 2002 (EA 2002).

Once a bankruptcy order has been made by the court, an official receiver will be appointed trustee in bankruptcy (“the trustee”) unless there are enough funds to appoint a private sector insolvency practitioner. As at the date of the order, the “bankrupt estate” vests in the trustee. The bankrupt loses any rights to his/her property apart from any equipment needed for use in his/her business, basic domestic equipment (such as furniture), and certain pension rights. Importantly, creditors can no longer pursue the bankrupt for payment; payment becomes the responsibility of the trustee.

The “bankrupt’s estate” essentially consists of all property which belongs to or is vested in the bankrupt at the commencement of the bankruptcy (i.e. the date the bankruptcy order is made).1 Property is defined widely in bankruptcy proceedings; there is no geographical restriction on the property which forms the bankrupt’s estate. The function of the trustee is to collect in and sell the bankrupt’s assets and to make payments to creditors in accordance with the Insolvency Act 1986 (IA 1986).

This Commons briefing paper considers those assets that pass to the trustee to form the “bankrupt estate” and the steps that should be taken by the trustee to protect and secure those assets for the benefit of the creditors. In particular, it considers the trustee’s treatment of the bankrupt’s surplus income, pension, and family home.

In addition, it considers the treatment of property that becomes available to the bankrupt after the commencement of the bankruptcy order but before his/her discharge (so-called “after-acquired property”). Subject to certain time limitations, after-acquired property may be claimed by the trustee for the benefit of creditors.

Finally, this paper considers the circumstances where assets disposed of by the bankrupt before the commencement of the bankruptcy may be reclaimed by the trustee as part of the bankrupt estate. The trustee has a wide range of powers under the IA 1986 to investigate events which took place prior to the bankruptcy. The trustee’s investigations may lead to a court application to overturn transactions at an undervalue or preference.

It is important to note that this Commons paper applies only to England and Wales. Scotland has its own legal procedure for individual insolvency, known as “sequestration”.

1 Section 283 of the Insolvency Act 1986

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1. Introduction

1.1 What is bankruptcy? For the purposes of this note, it is assumed that the bankrupt is subject to a creditor’s petition (i.e. a compulsory bankruptcy order.)

Bankruptcy is an option for any individual who cannot pay their debts “as and when they fall due”. Under the IA 1986, the debtor can apply for their own bankruptcy online (known as a “debtors petition”) submitting detailed information about their financial position; it is for an adjudicator to decide whether to grant the order. The process is different if someone else wants to make the debtor bankrupt; this requires a bankruptcy petition to the court either by:

• one or more creditors who are currently owed £5,000 or more by the debtor and that amount is unsecured (known as a “creditor’s petition”); or

• the supervisor or anyone bound by an Individual Voluntary Arrangement (IVA)2

Once a bankruptcy order has been made by the court, an official receiver will be appointed trustee in bankruptcy (unless a private sector insolvency practitioner is appointed). In effect, the official receiver is trustee of “last resort”.

For the purposes of this paper, it is assumed that the bankrupt is subject to a creditor’s petition (i.e. a compulsory bankruptcy order).

Two points should be noted. First, a sole trader (i.e. an individual trader such as a corner shop owner or a builder) who has not set up his business as a limited liability company, may be subject to bankruptcy proceedings. Secondly, an insolvent partnership can, depending on how it has been set-up, be wound up through the same processes used for bankruptcy, liquidating (winding-up) a limited company or both.

1.2 Function of the trustee in bankruptcy As at the date of the bankruptcy order, the bankrupt’s estate vests in the trustee. Creditors can no longer pursue the debtor for payment; payment becomes the responsibility of the trustee. Specifically, section 306 of the IA 1986 states:

306. Vesting of bankrupt's estate in trustee

(1) The bankrupt's estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.

(2) Where any property which is, or is to be, comprised in the bankrupt's estate vests in the trustee (whether under this section

2 An IVA is a formal and legally binding agreement between a debtor and his/her

creditors to pay back their debts over a specified period (usually 3 or 5 years). An IVA is approved by the court and is supervised by an insolvency practitioner.

5 Bankruptcy: assets that pass to the trustee

or under any other provision of this Part), it shall so vest without any conveyance, assignment or transfer.

The bankrupt has 21 days from the date of the bankruptcy order in which to provide the trustee with information relating to his/her financial affairs, including a full list of their assets (including property, pensions, insurance policies etc.) and a full list of their debts.

The trustee’s main task is to collect in and sell the bankrupt’s property and to make payments to creditors in accordance with the IA 1986. The bankrupt has a statutory duty to cooperate with his/her trustee. In addition, the trustee has wide powers of inquiry into the bankrupt’s property and dealings. In carrying out of this function and in the management of the bankrupt's estate, the trustee can use his/her own discretion (subject to the IA 1986.

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2. The bankrupt’s estate

2.1 Definition Once a bankruptcy order has been made, the bankrupt’s property will vest with his/her trustee; the bankrupt loses any rights to his/her property. Importantly, creditors can no longer pursue the bankrupt for payment; payment becomes the responsibility of the trustee.

The “bankrupt’s estate” is the term used to describe that body of the bankrupt’s assets that pass to his/her appointed trustee. Specifically, section 283 of the IA 1986 defines the bankrupt’s estate as follows:

(a) All property belonging to or vested in the bankrupt at the commencement of the bankruptcy; or

(b) any property which is or is treated as being comprised in the estate by virtue of the provisions of the Act which relate to the insolvency of individuals.

Under section 436 of the IA 1986, the term “property” is defined widely to include:

...money, goods, things in action, and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.

Importantly, property is also treated as being comprised in the estate where it becomes available after the commencement of the bankruptcy but before discharge. This includes “after-acquired property” (e.g. an inheritance). In other words, whereas the bankrupt’s estate is defined by reference to the date of the bankruptcy order, the statutory definition of “property” draws into the estate future and contingent interests, so long as they exist as proprietary interests at the date of the bankruptcy order.

However, it should be noted that property in the bankrupt’s estate is held by the trustee subject to the prior legal right of any person (other than the bankrupt) in such property. For example, a freehold interest in land owned by the bankrupt falls within his estate and can be sold by the trustee in bankruptcy for the benefit of creditors. However, if all or part of the property has been mortgaged, the property passes to the trustee in bankruptcy subject to the mortgagee’s interest, and subject to the mortgagee’s right to take possession even after the bankruptcy and to exercise all the other rights of a mortgagee (including the right of sale).

In circumstances where assets have been disposed of by the bankrupt before the commencement of the bankruptcy but have been reclaimed by the trustee (i.e. transactions at an undervalue or a preference), the assets are also treated as being part of the bankrupt estate (see below).

Finally, certain property is specifically excluded from the estate in order to maintain the bankrupt’s ability to earn an income and a reasonable standard of living (see Box 1 below).

7 Bankruptcy: assets that pass to the trustee

Box 1: Items specifically excluded from the bankrupt’s estate

The exemptions include:

• Such tools, books, vehicles and other equipment as are necessary to the bankrupt for personal use by him in his employment, business or vocation (subject to the trustee’s right to replace any of these items at a lower cost if this is reasonable);3

• such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his/her family;4

• property held by the bankrupt on trust for any other person does not form part of his/her estate – the bankrupt continues to hold the property on trust for the third-party beneficiary who remains entitled to it, subject to the terms of the trust;5

• a student loan made to the bankrupt before or after the date of the bankruptcy order is not regarded as an asset that the trustee may claim, if a balance of the loan remains payable; and

• certain state benefits are also excluded from a bankrupt’s estate by virtue of the provisions of other Acts

2.2 Assets disposed of prior to bankruptcy In addition to the normal asset realisations, the trustee has a wide range of powers under the IA 1986 to investigate events which took place prior to the bankruptcy. If there is enough evidence, his investigations may lead to the overturning of any transactions made at an “undervalue” (or gifts) or “preference”. If assets are reclaimed by the trustee, they are treated as being part of the bankrupt estate, available to the creditors. Further detailed information is set out below.

Transactions at an undervalue

Box 2: Transaction at an undervalue

The provisions relating to undervalued transactions are contained in sections 339, 341 and 342 of the IA 1986. Specifically, section 339(1)-(3) states: 339.(1) Subject as follows in this section and section 341 and 342, where an individual is adjudged bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt's estate may apply to the court for an order under this section. (2) The court shall, on such an application, make such order as it thinks fir for restoring the position to what it would have been if that individual had not entered into that transaction. (3) For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if –

(a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration (b) he enters into a transaction with that person in consideration of marriage, or (c) he enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the individual

3 Sections 283(2)(a) and 308(1) of the Insolvency Act 1986 4 Section 283(2)(b) of the Insolvency Act 1986 5 Section 283(3)(a) of the Insolvency Act 1986

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If prior to bankruptcy proceedings a debtor transfers an asset to an “associate” (i.e. a family member or friend) at less than its true market value, the trustee in bankruptcy can examine the circumstances of the transfer. If the transaction was at a substantial undervalue the trustee can apply to the court to have the property sold and the equity realised for the benefit of all the creditors. Where an action is commenced by a trustee on or after 15 September 2003, he must obtain sanction of the court or creditors’ committee.

To successfully challenge a transaction, the trustee must be able to show that the transaction was at made an undervalue and that it occurred during the 5 years prior to the day that the bankruptcy petition was presented. If the transaction was entered into in the period of 2 to 5 years prior to the presentation of the petition, the individual must either have been insolvent at that time or to have become insolvent as a result of the transaction.

The onus of proving insolvency is on the trustee except in relation to an “associate”. Where an individual has entered into an undervalue transaction with an associate, it is presumed that the individual was insolvent at the time. A person is an “associate” of the bankrupt if they are a spouse, a relative, or the spouse of a relative.

Under section 339(3) of the IA 1986 any transactions entered into in the 2 years prior to the date of the bankruptcy order are voidable, regardless of whether or not the individual was solvent, unless the transaction was for valuable consideration and entered into in good faith.

Transactions at a preference As outlined in Box 3 below, a preferential transaction is a payment or other transaction made by a debtor which places a creditor in a better position than they would have been in otherwise.

Box 3: Transactions at a preference

The provisions relating to preferential transactions are contained in sections 340, 341 and 342 of the IA 1986. Specifically, section 340 states: 340.(1) Subject as follows in this and the next two sections, where an individual is adjudged bankrupt and he has a relevant time (defined in section 341) given a preference to any person, the trustee of the bankrupt's estate may apply to the court for an order under this section. (2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not given that preference. (3) For the purposes of this and the next sections, an individual gives a preference to a person if –

(a) that person is one of the individual's creditors or a surety or guarantor for any of his debts or other liabilities, (b) the individual does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the individual's bankruptcy, will be better than the position he would have been in if that thing had not been done

(4) The court shall not make an order under this section in respect of a preference given to any person unless the individual who gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in sub- section (3)(b) above.

9 Bankruptcy: assets that pass to the trustee

(5) An individual who has given a preference to a person who, at the time the preference was given, was an associate of his (otherwise than by reason only of being his employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (4). (6) The fact that something has been done in pursuance of the order of a court does not, without more, prevent the doing or suffering of that thing from constituting the giving of a preference.

A trustee in bankruptcy may apply to the court for an order to recover sums or set aside a transaction which is found to be a preference, provided the transaction took place within a period of either 2 years where the creditor is a ‘connected person’ (i.e. a family member) or 6 months in other cases of the insolvency.

Court orders: preferred or undervalued transactions Section 342(1) of the IA 1986 contains examples of the possible orders the court may make, in relation to both a transaction at an undervalue and a voidable preference. However, on consideration of the evidence, the court has discretion to make whatever order it thinks fit or to dismiss the application made by the trustee.

A “bona fide purchaser acting in good faith” is protected by the IA 1986. However, any person who was the other party to a transaction at an undervalue or received a preference will not be protected if he/she had notice of the relevant surrounding circumstances (i.e. the fact that the transaction was at an undervalue or preference) and of the relevant proceedings (i.e. pending or actual insolvency).

If the court makes an order to overturn a transaction at an undervalue or preference, the reclaimed assets will form part of the bankrupt estate. This means that the assets (or their money value) can be distributed to creditors.

2.3 After-acquired property Assets obtained during the bankruptcy (i.e. after the date of the bankruptcy order and before the date of discharge) are referred to as “after-acquired property” (for example, an inheritance). Such property must be declared to the trustee, who can make a claim to it under section 307 of the IA 1986, for the benefit of the creditors (see Box 4 below).

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Box 4: After-acquired property – section 307 of the IA 1986

307. (1) Subject to this section and section 309, the trustee may by notice in writing claim for the bankrupt's estate any property which has been acquired by, or has developed upon, the bankrupt since the commencement of the bankruptcy. (2) A notice under this section shall not be served in respect of -

(a) any property falling within subsection (2) or (3) of section 283 in Chapter II (b) any property which by virtue of any other enactment is excluded from the bankrupt's estate, or (c) without prejudice to section 280(2)(c) (order of court on application for discharge), any property which is acquired by, or develops upon, the bankrupt after his discharge

(3) Subject to the subsection, upon the service on the bankrupt of a notice under this section the property to which the notice relates shall vest in the trustee as part of the bankrupt's estate; and the trustee's title to that property has relation back to the time at which the property was acquired by, or developed upon, the bankrupt. (4) Where, whether before or after service of a notice under this section -

(a) a person acquires property in good faith, for value and without notice of the bankruptcy, or (b) a banker enters into a transaction in good faith and without such notice, the trustee is not in respect of that property or transaction entitled by virtue of this section to any remedy against that person or banker, or any person whose title to any property derives from that person or banker

(5) References in the section to property do not include any property which, as part of the bankrupt's income, may be the subject of an income payments order under section 310.

Under the IA 1986, the bankrupt must notify the trustee of all after acquired property. Once notified, the trustee has a limited time frame in which to decide whether to claim all or any of the property for the benefit of the creditors (see Box 5 below).

Box 5: Time limit for notice under Section 307 of the IA 1986 states:

309(1) Except with the leave of the court, a notice shall not be served -

(a) under section 307, after the end of the period of 42 days beginning with the day on which it first came to the knowledge of the trustee that the property in question had been acquired by, or had devolved upon, the bankrupt;

(b) under section 308, after the end of the period of 42 days beginning with the day on which the property in question first came to the knowledge of the trustee.

For the purposes of this section -

(a) anything which comes to the knowledge of the trustee is deemed in relation to any successor of his as trustee to have come to the knowledge of the successor at the same time; and

(b) anything which comes (otherwise than under paragraph (1) to the knowledge of a person before he is the trustee is deemed to come to his knowledge on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.

In effect, the trustee must notify the bankrupt in writing of his claim within 42 days of his becoming aware of the after-acquired property. In practice, time would run either from the date the bankrupt informs the

11 Bankruptcy: assets that pass to the trustee

trustee of his acquisition of new property or the date the trustee becomes aware of the after-acquired property by some other means. The bankrupt has a responsibility to be honest about their situation with their trustee.

In exceptional circumstances, the bankrupt could make a representation to the trustee as to why they should be allowed to keep some (if not all) of the after-acquired property. The bankrupt would need to obtain proper legal advice as to whether or not they have grounds for making such a representation.

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3. Other assets that fall into the bankrupt’s estate

3.1 Surplus income If appropriate, the trustee in bankruptcy may apply to the court for an Income Payments Order (IPO). If the court were to make an IPO, the bankrupt (or his/her employer) would be required to make regular contributions towards his/her bankruptcy debts from their surplus income for a specified period. However, the court will only make an IPO if it is satisfied that the bankrupt would be left with sufficient income to meet the reasonable domestic needs of his/her family. Once an IPO is made, it can be varied by the court if the bankrupt’s circumstances change and they have an increase or decrease in income.

An alternative to an IPO is an Income Payments Agreement (IPA). This is a written agreement between the bankrupt and his/her trustee in bankruptcy. Under an IPA, the bankrupt agrees to pay a specified amount of their income to the trustee for a specified period of time.

An IPO or IPA normally lasts for 3 years from the date of the order. This means that an IPO may continue long after the bankrupt has been discharged from bankruptcy.

3.2 Pensions As outlined in Box 6 below, there are basically four types of pension that a bankrupt may have already or could be entitled to receive in the future. It is not unusual for the bankrupt to have more than one type of pension or to have several pensions of the same type.

Box 6: Types of pension

• State pension – this will include any payment from the State Second Pension (S2P) (formerly known as the State Earnings Related Pension Scheme or SERPS).

• Occupational pension – this is a scheme set up by an employer to provide members with retirement and death benefits. (Contributions may have been made by the employer, the employee, or both).

• Personal pension plan – this is a personal pension policy the bankrupt may have taken out with an insurance company to pay him/her benefits in later life. (Retirement annuity contracts are similar to personal pension plans and are treated in the bankruptcy in a similar way). Group personal pension – this is a personal pension policy taken out with a pension provider, often on favourable rates and terms negotiated by an employer or trade association. After a bankruptcy order is made, a group personal pension is dealt with in the same way as other personal pension plans.

13 Bankruptcy: assets that pass to the trustee

The treatment of pensions on bankruptcy changed with the introduction of the Welfare Reform and Pensions Act 19996 (the WRPA 1999). A distinction is made between bankruptcies made before and after the 29 May 2000 (see Boxes 7 and 8 below).

Box 1: Bankruptcies made before 29 May 2000

• Prior to the reforms brought in by the WRPA 1999, a bankrupt’s rights under his/her pension scheme constituted ‘property’ within the meaning of section 436 of the IA 1986 and, with certain minor exceptions, formed part of the bankrupt’s estate (under section 283 of IA 1986) and vested in his trustee in bankruptcy (pursuant to section 306 of the IA 1986).

• It follows from this that if an individual was made bankrupt on a bankruptcy petition presented before 29 May 2000, his/her trustee in bankruptcy may claim part or all of their pension, whether they are receiving it now or it is due in the future (i.e. uncrystallised pension rights). In respect of a personal pension plan, this means that from the date of the bankruptcy order all rights and benefits (except rights arising where the policy was used to contract out of SERPS) vest in (i.e. transfer to) the bankruptcy estate. The trustee in bankruptcy has the same rights under the policy as the individual had before becoming bankrupt. In other words, the trustee cannot claim the pension benefits until the bankrupt reaches the earliest retirement age allowed by the policy.

• Some occupational pension schemes have “forfeiture clauses”. Under a forfeiture clause, if a person is made bankrupt they automatically lose their pension rights, and their trustee in bankruptcy cannot claim the pension as an asset of the bankruptcy. If the occupational pension scheme in question has no valid forfeiture clause, then the trustee in bankruptcy will be able to claim pension benefits for the bankruptcy estate.

• Further, in order to protect scheme members, many pension schemes included forfeiture clauses. Although these varied from scheme to scheme, the purpose of them was automatically to forfeit the member’s entitlement to scheme benefits on his bankruptcy and for the trustees to have a discretion to distribute payments, up to the value of those benefits, to the member or his family (known as protective trusts).7

• It is important to note that if a trustee in bankruptcy has claimed pension benefits under a personal pension or an occupational pension, this may include any lump sum as well as regular pension payments.8

6 In respect of Northern Ireland, the Welfare Reform and Pensions (Northern Ireland)

Order 1999 7 “Nabarro’s Pension Law Handbook”, 12th edition, Jennifer Bell and Susan Jones,

Bloomsbury Professional, para. 1.54 8 In certain circumstances the bankrupt may be able to ‘buy back’ the benefits under

the scheme from the trustee in bankruptcy

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Box 8: Bankruptcies made after 29 May 2000

• The WRPA 1999 provides that where a bankruptcy order is made against a person on a petition presented after 29 May 2000, any rights of the bankrupt under an approved pension arrangement9 are excluded from the bankrupt’s estate.10 This means they cannot be claimed by the trustee in bankruptcy for the benefit of the creditors.11 Significantly, the WRPA 1999 also made forfeiture clauses ineffective as from 6 April 2002.

• Approved pension arrangements include pension schemes registered with HMRC under section 153 of the Finance Act 2004, together with certain occupational pension schemes set up by governments outside the UK and certain retirement annuity contracts.12 If the official receiver is satisfied that the pension in question is an approved pension arrangement, they will write to the bankrupt confirming that the pension does not form part of the bankruptcy estate.

• This change in legislation obviously provides valuable protection to a bankrupt with an approved pension. However, this concession was not without the following reservations: First, if the debtor had made excessive pension contributions the trustee in bankruptcy could apply pursuant to new section 342A of IA 1986 to claw these excessive contributions back for the benefit of the estate. (This could cover contributions paid up to five years prior to bankruptcy, personally, or via a company.) In effect, this new statutory provision enables a trustee to seek an order of the court recovering excessive contributions made into a pension scheme, where it has unfairly prejudiced the individual’s creditors. “Excessive” is described as an amount which is excessive in view of the individual circumstances when those contributions were made. A key factor will be whether the debtor was insolvent at the time the contribution was made or in consequence of it.13 Second, provisions contained in the IA 1986 relating to Income Payments Orders (IPOs) were amended by the WRPA 1999. As a result, if a pension was in payment during the period that the debtor remained an undischarged bankrupt, such pension payments could be taken into account in assessing the debtor’s overall income for the purpose of the court determining whether to make an IPO pursuant to section 310 of the IA 1986.

• If an unapproved pension policy does form part of the bankruptcy estate for the purposes of the WRPA 1999, the trustee in bankruptcy can claim the lump sum and the regular pension payments even after the bankrupt has been discharged from bankruptcy. However, in certain circumstances, it may be possible for the bankrupt to 'buy back' his/her interest in the pension policy from the trustee in bankruptcy.

• It is also important to note that if the pension scheme is unapproved, in certain circumstances the bankrupt may still be able to exclude it from the bankruptcy estate by applying to court for an Exclusion Order or by making a qualifying agreement with the trustee in bankruptcy.

9 Approved by HM Revenue and Customs 10 Section 11(1) of the Welfare Reform and Pensions Act 1999 11 In practice, if the official receiver/trustee in bankruptcy is in any doubt as to whether

a pension scheme has been approved by HM Revenue and Customs, they will write to the pension provider for confirmation

12 See section 11(2) of the Welfare Reform and Pensions Act 1999 as amended by SI 2006/754, regulation 15

13 These provisions enable a trustee to pursue an excessive contributions claim, even where the pension has been subject to a pension sharing arrangement

15 Bankruptcy: assets that pass to the trustee

For completeness, it should be pointed out that the bankrupt’s state pension or any payments from the State Second Pension (S2P) (formerly known as SERPS) do not form part of the bankruptcy estate. It is also worth pointing out that should a bankrupt die before the date of their automatic discharge from bankruptcy, and the pension scheme does not nominate a beneficiary (or class of beneficiary), the trustee in bankruptcy may claim the death benefit. There is a separate Library briefing paper on the treatment of pensions and Income Payment Orders on bankruptcy.14

3.3 Family home The bankrupt is usually most concerned about what will happen to his/her home. The largest potential asset in a bankrupt’s estate is usually a beneficial interest in the family home. The treatment of the bankrupt’s home and, specifically, whether the trustee has the right to force its sale is determined by the IA 1986 and the Enterprise Act 2002 (EA 2002).

As already mentioned, assets that form part of the bankrupt’s estate pass to the trustee and, subject to certain exceptions, the trustee may act in relation to them as he/she thinks necessary for the benefit of the creditors. This means that the trustee may need to sell the bankrupt’s home if this is the only way to raise money to repay creditors. This applies whether the home is freehold or leasehold or whether it is solely or jointly owned. However, it may be possible for the sale to be postponed until the end of the first year after the date of the bankruptcy order if a spouse or children live with the bankrupt. After that time, the court will only refuse an order for sale in exceptional cases.

Under section 283A of the EA2002, the trustee has 3 years in which to deal with the bankrupt’s home. There are several options available to the trustee, not just sale; for example, the trustee could apply to the court for a charging order over the property or sell the interest to a third-party (such as a family member). If the trustee does nothing (which is unlikely), his/her interest in the property reverts to the bankrupt (i.e. it will no longer form part of the bankruptcy estate).

However, section 286A applies only where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house which at the date of the bankruptcy was the sole or principal residence of:

• the bankrupt, • the bankrupt’s spouse, or • a former spouse of the bankrupt.

For bankruptcy orders made after 1st April 2004, the three years period in which the trustee must act begins to run from the date of the bankruptcy order. If, however, the trustee is not aware of the

14 “Bankruptcy and the treatment of pensions”, Library briefing paper (CBP7118), 7

March 2019 [online] (accessed 27 November 2019)

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bankrupt’s interest in a property, (i.e. it was not disclosed by the bankrupt) the trustee will have three years from the date on which he/she became aware of it to deal with the interest.

For old bankruptcy cases, where the bankrupt has long-since been discharged but their home continues to vest in the trustee (described in the Act as “pre-commencement bankruptcies”), the three years period ran from the date the provisions come into force (i.e. 1 April 2004) to 31 March 2007. A separate Library briefing paper provides further information on the treatment of the matrimonial home on bankruptcy.15

15 “What will happen to the bankrupt’s home?” Library briefing paper (CBP 5178), 1

May 2019 [0nline] (accessed 27 November 2019)

17 Bankruptcy: assets that pass to the trustee

4. What happens to the bankrupt estate after discharge?

The bankrupt will usually be automatically discharged from bankruptcy one year after the date of the bankruptcy order. Automatic discharge will occur even if:

• no payments have been to the creditors; • the bankrupt is still making contributions under an income

payments order/agreement; or • some of the bankrupt's assets have not yet been sold

On discharge, the bankrupt is released from bankruptcy restrictions and from most of the debts they owed at the date the bankruptcy order. However, there are certain debts a discharged bankrupt is not freed from, including:

• any court fines or debts arising from fraud or certain other crimes; or

• debts incurred after the date of the bankruptcy order.

Importantly, discharge from bankruptcy does not return ownership or control of property to the bankrupt, nor does it prevent the trustee from carrying out any of his/her remaining functions in relation to the bankrupt estate.

Even after discharge, there may still be assets that were owned by the bankrupt either when the bankruptcy began or which were acquired by him/her before discharge, which the trustee has not yet dealt with. These may include:

• property, • insurance or pension policy, • an interest in a will or trust fund etc.

These assets remain under the control of the trustee, who can deal with them in the future. In practice, it may be some time after the bankrupt’s discharge before all assets are dealt with. The only exception is the trustee’s ability to deal with the family home; as outlined above, the EA 2002 imposes a limitation period on the trustee’s ability to deal with this asset.

After discharge, the bankrupt has a legal duty to continue to provide information to the trustee if required to do so. However, the trustee cannot lay claim to any property acquired after his/her discharge.

BRIEFING PAPER Number 05271, 27 November 2019

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