A few weeks ago we had a client who had decided to sell one of his properties to his son for a price less than its market value. Our client had been informed that his mortgage company required an insurance policy in case our client was declared bankrupt. Our client wanted to know why the mortgage company insisted on this as there was no way our client believed he was ever going to be bankrupt.
In reality anyone can go bankrupt. As an example, someone might damage a valuable property by accident and if they were not insured and ended up being sued it could be possible that they could be forced to go bankrupt. However, in our client’s case we accept that this was highly unlikely, however, there is a theoretical risk which the insurance is designed to cover. As our client intends to give or dispose of their property for less than the market value there is also an unlikely possibility that they could go bankrupt within five years and that would mean that a court could actually set aside the transfer as a transaction at an undervalue. If it could ever be proved that a person disposed of his assets with the intention of defrauding their creditors then there is no limit of time.
From the mortgage company’s point of view, there is a risk that the transfer would be set aside and its security lost. This is the reason why the mortgage company insist on the insurance policy.