Following the new law: Can a bankrupt still protect his home?

The new Insolvency and Economic Rehabilitation Law repealed the protection afforded to debtors against the realization of their dwelling.

But does this mean that a bankrupt now has no capacity to defend this right?

So this is, not exactly

Adv. Yifat Ben David Bustos, in collaboration with Zap Legal

12/01/2022

Wednesday, 12 January 2022, 08:54 Updated: 09:15

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Bankruptcy (Photo: ShutterStock)

One of the biggest fears of debtors is that they will lose their apartment, which is their home and fortress.

This fear has been increasing in recent years, against the background of a significant change in legislation.

The new Insolvency Law, which came into force in recent years, abolished the protection given to debtors in the past against the realization of their apartment.

However, does the law mean that bankruptcies now have no ability to defend their home, and they are now losing any ability to defend themselves?

not exactly.

The new law and the new legal reality that followed it are complex, and open the door to various possibilities that I will seek to present in the coming lines.

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Strong past protection of the debtor's residence

In the past, before the enactment of the Insolvency and Economic Rehabilitation Act, debtors enjoyed the protection of section 33 of the Tenant Protection Act. The law provided broad protection for bankruptcies who own an apartment or who own a property that has been leased for generations, to continue living in the property, even after it has been sold as part of their bankruptcy proceedings.

The important point is that the property is sold as "occupied". That is, it could have been sold as part of the bankruptcy proceedings, but only on the condition that the debtor and his family members continue to populate it. The meaning of this protection: the seized property could only be sold at a significantly lower value (30% -40%) than the value of a vacant property.

Due to the protection applied to debtors, which significantly reduced the value of the property, it was possible for spouses of debtors, who hold half of the rights to the property, to purchase the other half at a low price, below the market price.

I will further note that according to the legal situation that prevailed in the past, it was determined that if section 33 of the Tenant Protection Law does not apply, the protection in section 86 of the Bankruptcy Ordinance applies.

This protection allows the court to sell the debtor's residential apartment only after they find alternative accommodation at a reasonable level or he and his family members are given compensation.

The courts have not set clear criteria for providing alternative housing to the debtor, emphasizing that the sale of the apartment should be a last resort.

First, it is necessary to examine what financial means are available to the debtor, what are his and his family's personal circumstances, and what their ability to obtain a roof after their apartment is sold.

The protection was abolished in the new law, but what now?

The new Insolvency and Economic Rehabilitation Act repealed the protection of the protected tenant given to bankrupt debtors and their families. The new law makes it possible to sell the apartment as a vacant property, and not as a occupied property, inhabited by the tenant and his family members, which increases the value of the apartment significantly.

As a result, the debtor's spouse - unlike in the past - cannot purchase his share of the residential apartment at an attractive price. But does the new law completely abolish the protection of the residential apartment provided to bankrupt debtors? not exactly.

Despite the cancellation of the protection, the court has broad discretion not to allow the sale of the apartment. According to section 229 (c) of the law, before the court approves the sale of the apartment, several conditions must be met:

the benefit that the creditors will have from the sale must be higher than the damage that will be caused to the bankrupt debtor.

it must be shown that there is no reasonable possibility of repaying the debt in another way whose harm to the debtor is less.

debtor and his family members will find a reasonable place of residence in their area of ​​residence that matches their needs or they will find an alternative arrangement in that area for a period to be determined by the court.

That is, the court has broad discretion to protect the bankrupt from the sale of his apartment.

If, for example, he is elderly or his family members suffer from medical problems or his expected income is low.

Broad discretion regarding the determination of the duration of alternative housing

Moreover, the law gives the court broad discretion also with regard to determining the period of time that will be given to the debtor and his family members alternative housing.

In this context, the court is required to consider, among other things, the age of the debtor and the age of his family members living with him; Their personal circumstances and health status; And, of course, the debtor's earning capacity and his proximity to the age of the provision.

In addition, the court may consider considerations that also relate to the debtor's conduct in the bankruptcy proceeding, including addressing the question of whether he acted in good faith in the proceeding or deprived his property assets (in other words whether he smuggled assets in the proceeding).

In conclusion, the new Insolvency and Economic Rehabilitation Act ostensibly repealed the protected tenant protection afforded to bankrupt debtors on their previously residential apartment. However, the law gives broad discretion to the court not to allow the realization of the debtor's residential apartment, which leads to the conclusion that in practice no major revolution has taken place in this matter.

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