Bankruptcy is often regarded as an option to avoid at all costs. However if your house has been repossessed it is likely that you will still be personally liable for significant mortgage shortfall debt. We explain how you can use Bankruptcy to write this off.

If your property is repossessed your mortgage lender will normally look to sell the property as soon as possible. They will then use the money raised from the sale to pay your outstanding mortgage. However if the property is sold for far less than the amount of the outstanding mortgage there will be a mortgage shortfall.

It is important to understand that you remain liable for this  shortfall debt and the mortgage company will continue to chase you for its repayment.

Options for solving a Mortgage Shortfall debt

You should not ignore mortgage shortfall debt. The mortgage lender is allowed to continue to add interest to it which will mean that the outstanding balance will continue to increase as long as it remains unpaid.

Given that you are unable to repay the debt from savings or other funds you will need to consider some form of debt management solution to deal with it. Depending on how much the shortfall is for and whether you have any other debts, you could consider using a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).

However to use either of these solutions you will need to make payments towards your debt on a monthly basis. If you cannot afford to do this these options will not be available to you and even if you can it could take a long time to become debt free.

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Using Bankruptcy to write off mortgage shortfall debt

The alternative solution if you cannot afford monthly payments or you simply want to resolve your debt problem as fast as possible is Bankruptcy.

This option is often seen as a last resort because of the effect it could have on your property. However because your home has already been repossessed you no longer need to worry about your property being taken from you. Nevertheless what it will mean is that your mortgage shortfall will be written off and you will be able to start a new chapter of your life debt free.

If you have disposable income then you may be asked to make payments towards your debts. However, it is likely that these will last no longer than three years. Shorter than the five years in an IVA and far less than the time it would take you to repay all of your debt using a DMP.

Should I allow my property to be repossessed and then go Bankrupt?

If your property has not yet been repossessed but you are struggling financially and feel that you are no longer able to pay your mortgage, you could consider voluntarily handing your keys back to the mortgage lender.

Once you have done this and moved into rented accommodation you could then declare yourself bankrupt to write off your outstanding debts.

Any mortgage shortfall and other unsecured debts that you have would be written off by the bankruptcy in the normal way.

Bankruptcy is not as bad as it sounds

The decision to declare yourself bankrupt should not be taken lightly. You must understand the implications of being bankrupt based on your individual circumstances before starting the process.

However, if the solution is right for you, then it is certainly not as bad as it sounds. In fact bankruptcy and is often a very sensible solution for dealing with debts particularly a mortgage shortfall if you are struggling to pay your mortgage and can no longer afford to remain in your property.