Insolvent leaseholders can cause a problem for managing agents tasked with collecting unpaid service charges on behalf of their RMC or landlord client. Brady Solicitors’ Cheryl Bates explains your options when a leaseholder is heading for bankruptcy.

Cheryl Bates property management solicitor at Brady SolicitorsIf an individual has debts that they cannot repay, bankruptcy is the likely result. An individual can file for bankruptcy themselves on-line or a creditor can apply, if the amount owed is more than £5,000.

Whilst it can take many months for a creditor to make someone bankrupt, an individual can make themselves bankrupt in as little as a month.

There are many disadvantages to going bankrupt (you cannot act as a director of a company and it is difficult to obtain credit), but it does enable an individual to escape historic debts – in many cases, much of the debt owed can be written off after only a year if the debtor does not own sufficient assets to repay.

Also, once a Bankruptcy Order has been made, creditors must stop most types of court action to recover their money. This includes any action to recover unpaid service charges.

Pending bankruptcy – your options for service charge recovery

If a leaseholder files for bankruptcy, or a creditor presents a petition for a Bankruptcy Order, you need to move quickly to obtain a judgment to forfeit the lease. While the bankruptcy is pending, you can still sue for rent or forfeit the lease – although the court can, at a later date, stay any of these actions to recover the service charge arrears.

How do you find out if a Bankruptcy Order has been made?

Once a Bankruptcy Order is made, details are entered on the Individual Insolvency Register. Once a Trustee is appointed, they will also register a ‘bankruptcy restriction’ on the title to any property owned by a leaseholder.

This is deemed ‘notice to the world’, even if direct contact has not been made with the creditor.

Recovering service charges once a Bankruptcy Order has been made

Once a Bankruptcy Order has been made, service charge recovery becomes tricky. A creditor – including the freeholder trying to recover their service charge arrears – needs to apply to the Court for permission to begin any proceedings against the bankrupt individual.

If you had already obtained a judgment pre-bankruptcy, then you may be able to forfeit the lease. However, it would be wise to expect a hard-fought and expensive battle with the solicitors for any Trustee in Bankruptcy, whose role it is to protect the bankrupt’s assets in order to sell them and pay out unsecured creditors, if not in full, then at least a proportion of the debt owed.

This means it is important to move swiftly recover unpaid service charge arrears before a Bankruptcy Order is made.

Key to this is establishing good and open communications with leaseholders who are in arrears.

Do you know why they aren’t paying their service charge? Is it a case of can’t pay, or won’t pay? If an individual is struggling to meet their financial commitments, the service charge may be well down their list of priorities.

Bankruptcy is a minefield for managing agents and their RMC clients and it is essential to take good advice on the relevant legislation and the options available.

Brady Solicitors bring impeccable knowledge together with the ability to move swiftly through legal proceedings. Contact our team for expert help and advice on your options for service charge recovery from a bankrupt leaseholder.

For advice on managing service charge arrears when a leaseholder has entered into an IVA (Individual Voluntary Arrangement), please click here.