The affect on your house or flat is one of the biggest concerns about Bankruptcy. Your property is not automatically at risk but you need to understand the implications.
Included in this article:
- Can you keep your house after you go bankrupt?
- What happens if there is no equity?
- What if there is equity in the property?
- How to buy back your financial interest
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The information in this article is relevant regardless if whether you own a house or flat. It also applies to jointly owned and shared ownership property.
Do I keep a paying my mortgage if I go Bankrupt?
Mortgage debt is not included in Bankruptcy Do you continue making your monthly mortgage payments? Are there other implications of Bankruptcy for home owners? To find out more please visit: http://beatmydebt.com/bankruptcy-frequently-asked-questions/what-happens-to-my-house-in-bankruptcy
Can you keep your house after you go bankrupt?
As a home owner, if you go bankrupt, your house is not immediately sold. You can remain living there initially as long as you keep paying the mortgage.
That said your financial interest in the property (known as your Beneficial Interest) is automatically transferred to the Official Receiver (OR). The value of this interest is equivalent to the value of your share of any equity.
The OR will review the value of the property and the outstanding mortgage or secured loans to determine what your equity is currently worth. They will then make a decision on what action needs to be taken and in what time scales.
You must ensure that you keep paying your mortgage. Mortgage debt is not included in bankruptcy unless the property has already been repossessed and there is a mortgage shortfall.
Struggling to get your head round all of this? We can help. Call us (0800 077 6180) or complete the form below. The advice is free and confidential.
What happens to your house if there is no equity?
If there is no equity in your house, your financial interest is worth nothing. As such the OR will not take any immediate action. Nevertheless the interest remains with them for up to the next 3 years managed by the Insolvency Service Long Term Assets Distribution Team (LTADT).
Normally two years and three months after the date of your bankruptcy the LTADT will contact you. They will ask you to provide an up to date valuation and mortgage statement.
If the value of your share of the equity at that time is less than £1000 the Beneficial Interest is returned to you free of charge and no further action is taken. Where it is more than £1000 but less than £10,000 a charge may be issued for the same amount. If more than £10,000, forced sale proceedings may start if you cannot raise funds in any other way.
After 2 years an 3 months the action taken regarding your house will depend on the value of any equity at that time.
What happens to my house in Bankruptcy if there is no equity?
If there is no equity your house is not normally at risk if you go Bankrupt. Will the Official receiver still want me to sell my property? Is it sensible to buy back the beneficial interest straight away? To find out more please visit: http://beatmydebt.com/bankruptcy-frequently-asked-questions/what-happens-to-my-house-in-bankruptcy
What if there is equity in your Property?
If there is equity in your property the type of action taken by the OR depends on the value of your share. Where it is less than £10,000 they will generally take no immediate action.
However after 2 years and 3 months the Insolvency Service will review the equity. If it is still less than £10,000 they are likely to issue a charge for the same amount. If more, an equivalent sum will have to be raised or the property is at risk of being force sold.
In circumstances where your equity is greater than £10,000 the management of your case will be passed to a Trustee. The Trustee generally takes no action for 12 months. After this you will have to make a reasonable offer to buy back your financial interest in your property. Where it is not possible for you to do this they are likely to start proceedings to force you to sell.
If your property is jointly owned the OR must still act to release your share of the equity. If it were to come to it the other party cannot prevent the forced sale of the property.
How to buy back your Financial Interest in your house
It is possible to buy back the beneficial interest in your property at any time after you go bankrupt. Your options for doing this will depend on how much equity is in your property.
Negative or Zero Equity
If your property has zero equity or is in negative equity your beneficial interest can be bought back from the Official Receiver for £1000 plus the solicitor’s costs. If you are still bankrupt this money must come from a third party.
Positive Equity
Where there is equity in your property an amount equal to your share of this or £1000 (which ever is the greater) must be paid to the Official Receiver / Trustee. Again if you have not yet been discharged this must come from a third party.
It is in your interest to buy back your financial interest as quickly as possible. You then protect yourself against further house price increases and increases in the value of your equity as a result.
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Hi I am just trying to find an answer to the question of what would happen to my rental properties in the event of my bankruptcy. There are 4 in negative equity and I really want to see the back of them. Can the mortgage companies chase for outstanding equity difference for 12 years? I also live in a rented property.
Hi Stewart
If you have investment properties that you rent out but they are in negative equity and you just want to be rid of them Bankruptcy may well be a sensible option for you.
You would first need to stop paying the mortgage payments and inform the lenders that you want them to repossess the properties. If any are currently tenanted you might also want to inform the tenants so they can plan to make alternative arrangements.
You can then declare yourself bankrupt at any time (you do not have to wait until the properties are sold which could drag on for months).
Any shortfalls on any of the mortgages which appear when the lenders eventually sell are known as contingent debts. They are written off by your original bankruptcy because the potential for them already existed on the date you went bankrupt. The lenders are not allowed to chase you for these debts at all.
Hi I am in a shared ownership property and my Iva may fail. If the creditors decide to make me bankrupt how long will it be before I have to sell my property and if I’m paying back my creditors back through the court how will I get funds to put property on the market or will this be taken out by mortgage company once sold. I am not behind with mortgage payments or rent.
Hi Lorraine
It is important to understand that if your IVA fails it is actually very unlikely your creditors will make you bankrupt. That said if they did your house would not be automatically at risk. This would only be the case if you have significant equity in it.
To calculate the current equity you need to take the current value of the property as a whole and then see what your share is worth. In other words if the total market value is currently £300k and your share is 50% your share is worth £150k. Then you need to deduct your outstanding mortgage from the value of your share. So using the above example if your mortgage is £140k then your equity in the property is £10k (£150k less £140k).
As highlighted in the article above where your share of any equity is less than £10k the official receiver will normally not take any action for 3 years. You can continue living in the property as long as you continue paying the rent and your mortgage.
At the end of 3 years if your equity is zero or negative your interest in the property will simply be returned to you and that is that. If the equity at that time is £10k or less the most likely outcome is that the OR will put a charge against your property for that amount. This would then only be paid when you chose to sell.
You would only ever be forced to sell if your share of the equity is a significant sum (normally £10k or more) and you cannot come up with this amount in any other way.
My bankruptcy officially ends tomorrow but I have to pay the OR an amount for my share of the house. The annoying thing is they have doubled what they want? We agreed to £45k. They now say they have had to do more work and its now £61k? Any thoughts?
Hi Skip
The amount of money you need to raise to buy back your interest in your property from the OR is based simply on your share of any equity currently in the property. The rule is that the calculation of equity must be based on an up to date valuation (i.e. one carried out in the last 3 months). It has nothing to do with the amount of work that the OR has or has not done.
As such if you have a recent valuation and a mortgage statement showing that your share of the equity is currently £45k the OR would be bound to accept this amount as a reasonable offer. They cannot demand any more unless they believe your calculation is wrong.
Perhaps the reason the OR is demanding £61k is that they have now valued the property higher than your initial estimate. If this is the case you should get your own up to date valuation from an independent estate agent or valuer. Where this shows your share of the equity as still being £45k (or less) you can present this to the OR. If they believe the valuation is reasonable they will accept it.