Tuesday, 9 May 2017

Avoiding Losing Your Home Because of Your Partner's Debts


You jointly own a flat or house with your partner. Perhaps you are married to them, perhaps you are not. Perhaps your name is on the deeds, perhaps it is not. You partner needs money and borrows it using the property as security for the loan. Your partner is then made bankrupt.Can you say to your partner's creditors " You can't touch the property to recoup any part of what you lent my partner." Possibly, yes. You would be taking advantage of what is called - altogether now - the equitable doctrine of exoneration. It is a doctrine which was doing the rounds in the 18th and 19th centuries. As a Court of Appeal decision the other week * demonstrates, it's as good as it ever was.

What happened in the Court of Appeal case was that the a husband who was a solicitor had debts in his law firm. So he borrowed more money   to pay off those debts under an existing mortgage on the home which  was in his sole name but which he still jointly owed with his wife.  In legal eyes, you can be a joint proprietor of  property without being on the deeds (see Breaking Law for plenty on that). Eventually, the law firm closed down and the husband was made bankrupt. The husband's trustee in bankruptcy applied to the bankruptcy court for the property to be sold. But the court decided that the equity of exoneration came into play and refused the sale. This was because the wife was to be treated as having a charge over  her husband's half-share in the property which exhausted his interest. 

This doctrine of exoneration can come into play in a variety of other situations: for example, where an unmarried couple separate after one of them has joined in a mortgage of their property to enable the other to pay off their debts and the court has to decide what are their shares in the property taking those debts into account OR where a creditor of one cohabitee is seeking to enforce a judgment debt against the couple's property.

But hold on. Exoneration won't work if the loan was raised for your benefit - so you can both go on holiday or where some of the debts are yours. This was the area of dispute in the recent Court of Appeal case in which the ruling was that the benefit had to be direct or closely connected to the borrowing and be capable of carrying a financial value. There was no such benefit to the wife in that case.



* The case is Armstrong (as Trustee in Bankruptcy of Onyearu) v Onyearu and another [2017] EWCA Civ 268