{"id":1561,"date":"2013-12-18T09:54:08","date_gmt":"2013-12-18T09:54:08","guid":{"rendered":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/?p=1561"},"modified":"2020-10-20T11:14:42","modified_gmt":"2020-10-20T10:14:42","slug":"buy-to-let-insolvency","status":"publish","type":"post","link":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/buy-to-let-insolvency\/","title":{"rendered":"Buy to Let & IVA or Bankruptcy"},"content":{"rendered":"\n

During the property boom which preceded the recession many people began to dip their toes in the property market in the hope and expectation that increasing equity over a period of years would provide them with a reasonable or better return on their investments. <\/p>\n\n\n\n\n\n\n\n

Buy a property at a reasonable price, let it out for a few years, sell it on and pocket the profits. Hence the boom extended to what became known as the \u2018Buy to Let\u2019 sector. The idea was simple enough. An individual or a couple with a reasonable disposable income purchase a property and let it out to tenants. Mortgages of up to 100% were easy to come by and rents were buoyant. In principle and often in practice the rental income more than covered the monthly mortgage payments. The property increased in value year by year and in due course the sale of the property would yield a nice little profit, even allowing for capital gains tax. And why stop at one property? If the idea worked with one property, why not go for two, six, twenty, a hundred or more properties? <\/p>\n\n\n\n

What could go wrong? Two things could and did. The continuous \nincrease in property values slowed down and eventually began to go the \nother way as property sales volumes and prices tumbled. The demand for \nrental properties began to reduce and rental income began to fall. \nSuddenly those who entered the \u2018Buy to Let\u2019 sector found that they were \nunable to reverse the process easily. As demand for property fell so did\n prices. And so did rental incomes. The mortgage payments on some \nproperties began to exceed the rental income and in some cases it became\n impossible to let the properties at all. The prospect of one\u2019s property\n being in negative equity became a reality for many in the sector. \nSelling properties at a loss became a most unattractive option. People \nheld on to their \u2018Buy to Let\u2019 properties for too long hoping that the \nhousing market would improve but it simply got worse. Eventually many \npeople found that they were insolvent and that their disposable income \nwas insufficient to bridge the gap between their mortgage payments and \ntheir rental income. Thus their mortgage payments began to fall into \narrears and they began to look around for solutions to their financial \ndifficulties.<\/p>\n\n\n\n

\"Buy<\/figure><\/div>\n\n\n\n

Given that selling the properties would lead to shortfalls debtors \nfound that their options were limited to petitioning for Bankruptcy \n(BCY) or entering into an Individual Voluntary Arrangement (IVA). \nChoosing the best option to go with very much depends on the \nindividual\u2019s circumstances. The main factor to be considered in an IVA \nis the attitude of the creditors and in BCY the approach of the Official\n Receiver and\/or of the Trustee.<\/p>\n\n\n\n

Buy to Let in an IVA<\/strong><\/h2>\n\n\n\n

In proposing an IVA, the \u2018Buy to Let\u2019 property has to be considered \nfrom two perspectives \u2013 the net cost to the debtor of retaining the \nproperty and the equity therein. If the debtor has several or indeed \nmany such properties, then each property usually has to be considered \nseparately and on its own merits, so to speak.<\/p>\n\n\n\n

If a property is \u2018cost neutral\u2019<\/em> i.e. the rental income is \nwholly consumed by the mortgage payments (plus any other valid \nassociated costs such as insurance or maintenance) with no significant \nsurplus or deficit arising then creditors will only be interested in \nwhether there is any equity available in and recoverable from the \nproperty. Unsecured creditors will not force the debtor to sell a \nproperty which is in negative equity since any shortfall arising would \nthen be introduced into the IVA and would have the effect of reducing \nthe dividend for all creditors. If on the other hand the property has a \nsignificant amount of positive equity then creditors will expect all \nsuch equity or a high percentage of it to be introduced into the IVA. \nThus the property in question may have to be sold or the equity \naddressed by some other means such as the contribution of third party \nfunds or remortgage.<\/p>\n\n\n\n

If the property is \u2018cost positive\u2019<\/em> and generates significant\n net income i.e. the rental income exceeds the mortgage payments (plus \nany other valid associated costs such as insurance or maintenance), then\n creditors will expect any such surplus income to be contributed to the \nIVA over the full term of the IVA. If the property is in negative \nequity, it is not in the interests of creditors that it be sold. If \nthere is significant equity in the property then creditors will expect \nall or a high percentage of such equity to be realized by sale or \nremortgage before the end of the term of the IVA, usually in the fourth \nor fifth year.<\/p>\n\n\n\n

Finally if the property is \u2018cost negative\u2019<\/em> i.e. the rental \nincome is significantly lower than the mortgage payments (plus any other\n valid associated costs such as insurance or maintenance), then \ncreditors might require the debtor to sell the property. Following such a\n sale, the savings made from eliminating the \u2018cost negative\u2019<\/em> \nfactor would allow monthly contributions to the IVA to be increased. If \nthe property was in positive equity, any equity realized would be \ncontributed to the IVA. Obviously, if the property was in substantial \nnegative equity, the shortfall following its sale would be claimed as an\n unsecured debt of the arrangement. This could depress the dividend to \nsuch an extent that it would be in the interests of the unsecured \ncreditors to allow the debtor to retain the property, not withstanding \nthe fact that its retention would be \u2018cost negative\u2019<\/em>. However, \nonce the property is no longer in negative equity, creditors might \nrequire that it be sold and the savings introduced into the IVA.<\/p>\n\n\n\n

 Buy to Let in Bankruptcy<\/strong><\/h2>\n\n\n\n

The bankrupt\u2019s estate vests in the trustee immediately on his \nappointment taking effect or in the case of the official receiver, on \nhis becoming trustee. The trustee can disclaim any onerous property and \nany property in significant negative equity would be regarded as onerous\n property.<\/p>\n\n\n\n

Property with equity of up to \u00a31,000 \u2013 deemed de minimis \u2013 can \nusually be bought back from the trustee for a nominal sum. It is not \nuncommon for the family of a bankrupt to buy back such a property on \npayment of \u00a31 plus the official receiver\u2019s costs of \u00a3211.<\/p>\n\n\n\n

If the equity in the property is in the range of \u00a31,000 to \u00a35,000 \nthen the trustee may seek to register a charge on the property rather \nthan trying to realize this equity by having the property sold, with the\n risk that the sales price might not reach market value and that the \nequity realized might not cover the cost of sales.<\/p>\n\n\n\n

If the equity in the property exceeds \u00a35,000, the trustee may seek to\n sell the property and to realize the equity for the benefit of \ncreditors and to pay the costs of bankruptcy. The bankruptcy laws deal \nin great detail with the rights and duties of the trustee and the \nbankrupt and the rights of other parties such as the bankrupt\u2019s family \nand of creditors.<\/p>\n\n\n\n

Where a bankrupt owns one or more \u2018Buy to Let\u2019 properties it appears \nthat there has been a relatively recent change in the attitude of some \ntrustees to the treatment of such properties. Historically where there \nwas little or no equity in such a property, trustees allowed the \nbankrupt\u2019s family to \u2018buy back\u2019 the property and allowed the bankrupt to\n manage the letting of the property and the servicing of the mortgage. \nAny surplus income thus generated would constitute part of the \nbankrupt\u2019s disposable income and be subject to an income payments order.\n Thus the trustee would receive payments from the bankrupt for up to \nthree years.<\/p>\n\n\n\n

More recently, it appears that some trustees seek to seize control of\n such \u2018Buy to Let\u2019 properties and to assume all responsibility for them:\n receive all rental income; pay the mortgage and all associated \ninsurance & maintenance costs; deal with all letting and tenant \nissues and take all the day to day decisions relating to the properties.\n Should the properties go into significant positive equity in the first \nthree years of the bankruptcy, the trustee would also be in a position \nto realize the equity prior to the property re-vesting in the bankrupt \ndebtor. The motivation for this change in approach by trustees is \nunclear unless they expect to improve the returns for creditors by \ntaking such action. Should you become bankrupt and the trustee is \nintending to seize control of your \u2018Buy to Let\u2019 properties, you should \nseek to obtain legal advice on this matter.<\/p>\n","protected":false},"excerpt":{"rendered":"

During the property boom which preceded the recession many people began to dip their toes in the property market in the hope and expectation that increasing equity over a period of years would provide them…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_seopress_robots_primary_cat":"none","_seopress_titles_title":"","_seopress_titles_desc":"","_seopress_robots_index":"","footnotes":""},"categories":[2,7],"tags":[],"class_list":["post-1561","post","type-post","status-publish","format-standard","hentry","category-bankruptcy-articles","category-iva-articles"],"_links":{"self":[{"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/posts\/1561","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/comments?post=1561"}],"version-history":[{"count":4,"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/posts\/1561\/revisions"}],"predecessor-version":[{"id":13538,"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/posts\/1561\/revisions\/13538"}],"wp:attachment":[{"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/media?parent=1561"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/categories?post=1561"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nationaldebtrelief.co.uk\/debt-articles\/wp-json\/wp\/v2\/tags?post=1561"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}