If a client goes bankrupt, then probably the last thing they will be thinking about is buying the negative equity. But, it may be negligent not to advise them to do so.

If a bankrupt’s property is in negative equity, then the trustee in bankruptcy will usually conclude that a sale is not worthwhile. But, if the property ceases to have a negative equity (eg property prices increase), then the trustee will often take proceedings for possession and sale. Note, however, under Enterprise Act 2002, where a bankrupt’s estate includes a house that is the principal residence of the bankrupt (and/or spouse), then the trustee has three years to take action to realise the asset. If, after three years, the trustee has failed to do so then the asset will revert to the bankrupt.

Where jointly owned property is in negative equity, and the Official Receiver is the trustee in bankruptcy, the receiver runs a low-cost conveyancing scheme whereby the beneficial interest owned by the receiver can be bought for only £1. But, if the beneficial interest is not purchased while in negative equity, and the equity subsequently turns positive, that scheme will no longer be available. Solicitors are often accused of negligence for not advising clients in negative equity of the availability of the low-cost conveyancing scheme. Given the wide extent of negative equity at the moment, this is a potential risk that the prudent should bear in mind. Ensure that clients are made aware of the existence of the £1 scheme. Source: Zurich@risk September 2009.