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 rent 50% of my home through the housing association and have a mortgage for the other 50%. If I go down the bankruptcy route and there is quite a bit of equity in my home (however the lease is very low). Would shared ownership still come under the jointly owned home section and I’d have to sell my 50% share?
Hi Sarah
The bankruptcy rules regarding your property apply whether it is owned 100% by you or it is shared ownership. If it is shared ownership your financial interest in your share of the property is transferred to the official receiver and they will look to realise this value.
The way your equity is calculated is as follows. Lets say the property value is £300k. As such your share is worth £150k (50%). Now lets say your mortgage is £100k. This means your equity in the property would be £50k (£150k less £100k).
Based on the above calculation (but putting in your own figures for the home value and your outstanding mortgage) if you have equity of more than £10k it is likely that the OR will appoint a Trustee and you will have 1 year to raise an amount similar to buy back your interest. If you were unable to do that the Trustee would most likely press for the sale of the property.
Hi
I became bankrupt in January 2017, for almost 2 years I have been paying into an IPA – I have a year left on this agreement
My house is in negative equity and this was included in the bankruptcy. The mortgage is in the name of myself and my late husband .
I desperately want to move house but if sold of course there will not be enough to pay off the mortgage – can I simply hand the house back to the mortgage lender?
Thankyou in advance
Hi Katherine
Given you have not changed your mortgage since going bankrupt (which is unlikely) then the answer to your question is yes. If you hand the keys back to your mortgage lender and allow them to repossess any subsequent shortfall is a contingent debt and is written off by your original bankruptcy. You would not have to worry and you would not be liable to pay it.
Once the house is sold and the lender asks you to pay the shortfall you simply remind them that you went bankrupt in Jan 17. As such they cannot chase you for the debt. At the same time you inform the official receiver’s office that is managing your case. They will deal with the lender and the shortfall debt for you.
Remember, if as a result of moving to different accommodation your living expenses go up then you also need to speak to the Official Receiver about reducing your IPA payments accordingly.
Hi, The house and mortgage has always been in my wife’s name. I can’t find information regarding the possible effects to her or the house if I choose to go bankrupt. Am I correct in saying my wife or her house won’t be affected in my case? We have no joint debt.
Thank you for any advice
Hi Gary
Unfortunately the answer to your query is not straight forward. The fact that the property and mortgage is in your wife’s name does not automatically protect it if you go bankrupt. This is because in the eyes of the law as a married couple you each automatically have an interest in each other’s assets. As such it might be affected.
Given you are married the official receiver would consider that you do have an interest in the property unless there is clear evidence to the contrary. An example of such evidence would be of you have only been married a short while and your wife clearly bought the property before you met with her own funds.
You also have to consider the amount of equity in the property. If the amount is small then even if the OR considers you have an interest, the value would be low and so may not pose much of a problem. As a result Bankruptcy might still be a good way forward.
To give you sensible advice I would really need to have a chat with you on the phone. I would be more than happy to do that if you want to give me a call (0800 077 6180).