Will I lose my equity in Bankruptcy

Will I lose my equity in Bankruptcy

One of the concerns when considering bankruptcy is how it could effect any equity you have in your property. Will you get to keep it and if not how would your creditors get access to it?

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Releasing equity in bankruptcy

Bankruptcy will normally write off most if not all of your unsecured debt, but that may come at a price. If you are a homeowner your share of any equity will have to be released and paid to the Official Receiver. There are basically two ways this can happen.

The first and best option is for you to “buy back” the value of your equity from the Official Receiver (or Trustee if appointed) for a cash lump sum. The amount you have to pay will usually need to be the equivalent of the value of your share of the equity (although you may be able to offer less to a Trustee). Once this is done your property is yours to keep.

If you are unable to unable to offer a cash lump sum and the amount of your equity is greater than £10k there is a risk your property may have to be sold to release your share. If you are living with family members this is unlikely to happen within the first 12 months. However after that the Official Receiver or Trustee could ask the court for an Order to force you to sell.

If you go bankrupt the Official Receiver does not want to sell your house. They would much prefer you buy back your financial interest with a cash lump sum.

Joint equity in bankruptcy

If you own your property with someone else, any equity would normally be seen as being owned jointly with them. As such the total equity is split. This is often on the basis of a 50/50 ownership but could be divided differently based on pre agreed terms.

In the event of your bankruptcy only your share of the total equity is at risk. The other joint owner’s share is protected. It would common for them to offer to buy your share from the Official Receiver thus protecting the property.

If they are unable to do this then depending on the amount of equity the Official Receiver or Trustee can still apply to the court for an Order for sale.  After the property is sold the other joint owner will receive their share of the equity released to keep.

Where the Official Receiver applies for an Order for sale it is very unlikely the other joint owner would be able to prevent this.

Can I avoid losing my house?

If the value of your share of the equity in your property is over £10,000 then your property is potentially at risk if you go bankrupt. As discussed above you can protect your home by buying this back from the Official Receiver.

If it is not going to be possible to ‘buy’ your equity then you may well lose your home. In these circumstances bankruptcy may not be a sensible solution for you unless you have decided to give up your property and rent.

As an alternative you may want to consider an Individual Voluntary Arrangement. This solution gives far more protection for your property but will require you to make reasonable monthly payments towards your debts for 5-6 years.

What if someone else paid the deposit?

A third party may have paid the deposit when you bought your house. This person could be the other joint owner of the property or a third party who is not a registered owner.

Where this is the case, the person who paid the deposit can often claim that the money was simply a loan and must be repaid in the event of a sale. In these circumstances it may be possible to argue that the sum must be deducted when calculating the amount of equity available for the Official Receiver.

This could make the difference between the house being at risk or not after bankruptcy. If once the deposit is repaid there is little or no equity, the OR may not look to sell the home at all.

The effect on home equity must be carefully considered before choosing any debt solution. Call us (0800 077 6180) or complete the form below to get expert advice on deciding which is right for you.

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2 thoughts on “Will I lose my equity in Bankruptcy

  1. Richard Walker says:

    I’m seperated from my wife nearly 18months now, she lives in the house with my 3 children. She and 2 of my Children all get DLA for autisim and adhd, and are also home schooled by her. A rough online valuation shows the house valued at 205k, with 185k left on it to pay.

    I have debts of around 19k and been adviced by step change to declare myself bankrupt, at the time i thought there was no equity in the house as my wife said there wasn’t.

    Do i need to inform her that i’m looking at going bankrupt??

    1. Hi Richard

      If you are a joint owner of a property with your ex and there is £20k of equity in the property bankruptcy could be an issue for you. On the face of it 50% of the equity is yours and the official receiver must act to release this for the benefit of your creditors.

      Given your share is likely to be £10k or less the official receiver is unlikely to take any immediate action. However after 2 years and 3 months they will want to recalculate the value of your share and realise this sum. Your options at that time will be either to pay the equivalent amount to them to “buy back your interest”. Alternatively if the value at the time is £10k or less the OR may decide to take a charge against the property. Worst case they can apply to the court to force a sale.

      Given this risk I suggest you consider avoiding bankruptcy and looking at the option of an IVA or Debt Management Plan to manage your debt. This would protect the house. If neither of these options are affordable then you must take specialist advice before proceeding with bankruptcy. Please give us a call if you want to discuss this in more detail (0800 077 6180).

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