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 James,
I have a joint mortgaged property with about 25k equity at market value. The fixed mortgage terms states that if sold now will have to pay around 11k in penalty fees. That would leave my share of beneficial interest at 6.5k. Would the OR take action against the property at this amount? Thank you for your help
Hi Madalin
Your equity calculation is correct. You need to take into account the early redemption fee as you have done. Give your share of the equity based on this calculation is £6.5k the OR would not take any immediate action against the property. As long as you maintain the mortgage payments you can remain in the property. However (and this is very important to understand), the OR retains a financial interest in the property.
The standard rule is that after 2.5 years they will then recalculate the value of your share of the equity. You then have to pay them an equivalent sum to “buy back” the financial interest. If you are unable to do this they can either put a charge on your property for this amount or force you to sell to release your share there and then. The action they take will depend on the amount of equity at the time.
If you believe the value of your equity will increase over the next 2.5 years you mitigate the risk by offering to buy back the financial interest at any time.
Hi there.
I am currently living in the north east of England with my partner (not married) and young daughter. I have struggled for the past 3 years now with a large number of debt, I mentally & physically can’t make the payments. I’ve tried DMP & considered IVA’s only to be told my level of debt is far too high unfortunately.
Now, I have considered bankruptcy for some time now but I need to know what will happen to my house. I have a joint mortgage with my partner and we roughly have 10k each in equity as I do believe it is spilt equally? My debts are unsecured & only in my name. With debts of roughly 45k. Could I go bankrupt at all? Thanks in advance
Hi Philip
If you are a property owner, bankruptcy is always a complex issue. You don’t have to rule it out but the implications have to be considered very carefully. You could go bankrupt but you would need to understand that your share of the equity (£10,000 based on what you have said) would have to be realised for the official receiver and your creditors. If this is not properly planned for, you could end up having to sell the house.
I would be more than happy to have a chat to you about this and whether it would be a sensible option and the implications if you like (0800 077 6180).
I have the situation where I have a mortgage and a second loan. The second loan owner is threatening to make me bankrupt. The loans combined outweigh the equity in the property. Would the OR look to sell? If not, how is the second loan dealt with after the bankruptcy? Do they chase? Can they force a sale?
Hi Keiren
If you were to go bankrupt and there is zero equity in your property (or negative equity), the official receiver will take no immediate action. They will certainly not force a sale. They will wait for 3 years and then reassess the value and equity in the property at that time. If there is still no equity, the financial interest in the property will be returned to you.
Given the mortgage and secured loan are both secured against the property, they are not included in the bankruptcy proceedings unless the property is subsequently sold and there is a shortfall on either the mortgage, secured loan or both. If you want to keep the property you will need to maintain the mortgage and secured loan payments. If you have reached a point where you simply can’t / don’t want to maintain the mortgage and secured loan payments you can consider stopping the payments and allowing the primary mortgage lender to repossess the property.
After the primary mortgage lender sells the property, any shortfall (debt still owed by yourself) owed to either the primary mortgage lender or secured loan lender will be written off as debts of your bankruptcy.