Can I include my mortgage debt if I go Bankrupt?
The general rule is that you can only include unsecured debts in Bankruptcy. Because a mortgage is secured against your property this debt cannot therefore be added. However there may be times when this rule does not apply.
Given this we explain what happens to your mortgage if you go bankrupt and under what circumstances this type of debt could be added.
How do I pay my mortgage if I am Bankrupt?
Because your mortgage is a secured debt it is not included in Bankruptcy. This means that you will have to keep paying your mortgage payments each month. If you do not then your house will be at risk of being repossessed.
They way you keep up your mortgage payments is that they are included in your list of allowed living expenses. You will always be able to use your income to make these payments before you have to pay anything towards your debts.
In this sense this solution will actually make it easier for you to pay your mortgage as you no longer have to feel under any pressure to use your mortgage money to pay your other unsecured debts.
Will my house be at risk after I go Bankrupt?
One of the main concerns about Bankruptcy is that it could result in you having to sell your property. The fact is however that this will not automatically be the case. The question of what happens to your house very much depends on the amount of equity if any that there is in it.
If you know that there is little or no equity or negative equity then it is very unlikely that you will have to sell and you will be able to keep your home. However you must make sure that you keep paying your mortgage. This will be your responsibility out of your allowable living expenses budget.
BMD Tip: If you do not keep up with your mortgage payments your house will be at risk of repossession by your mortgage lender. Bankruptcy does not give you any protection from this.
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What if there is a lot of equity in my property?
If you have a lot of equity in your property then the rule that you have to continue paying your mortgage still stands. However there is also a high possibility that you might have to sell your property to release your equity so that it can be used to pay your unsecured debts.
For this reason you might feel that continuing to pay your mortgage is simply pointless and you will decide to sell your property straight away.
On the other hand, if you are the sole owner of the property all of the the equity will have to be paid into your bankruptcy. As such there is nothing to protect and you might decide to sell immediately or even stop paying the mortgage and allow the property to be repossessed if an easy sales process is not possible.
BMD Tip: If your property is jointly owned the other joint owner will be able to keep their half of the equity if the house is sold. For that reason you might decide to keep paying the mortgage and wait to sell until you can get the best possible price for the property.
Can a Mortgage Shortfall be included in Bankruptcy?
If your property is repossessed it will be sold by the mortgage company. If after the sale there is a mortgage shortfall you will still be liable to pay this. However the key is that this debt is now unsecured. Because of this it can be included in Bankruptcy.
If you have already gone bankrupt but then you decide that you cannot afford to pay your mortgage, you could stop making the payments altogether and allow your house to be repossessed. Any mortgage shortfall once the house is sold will still be included even if you have already been discharged from your Bankruptcy.
If you are the sole owner of the property it is likely that you will stand to gain nothing from the sale of the property as all the equity will have to be paid to the official receiver.
As such rather than going through a drawn out sales process during which time you are still required to pay your mortgage, it may be easier for you to simply move out of your property, allow it property to be repossessed and then let your official receiver deal with any equity or shortfall after the sale.
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