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26.02.2018

Bankruptcy and Your Home

Bankruptcy and Your Home

Your Mortgage

If you own your home, whether it is sold or not usually during the bankruptcy process depends on the amount of equity in the home. Equity is the amount of profit you would make if an asset was sold. In terms of your home, this usually means: equity = current value of home – remaining mortgage – cost of sale (eg tax). If you have a significant amount of equity in your home, it may be worth remortgaging your home and using this lump-sum to settle your debts, rather than risk losing your home altogether with bankruptcy.

If you share a mortgage with another person, it can still be sold, but you can prevent this by getting another person to buy your ‘beneficial interest’.  Your ‘beneficial interest’ is the same as the equity if you are the sole owner, but if you share the home then it is the equity divided equally between you. For example, a house owned by two people with £20,000 equity means that each person has a ‘beneficial interest’ of £10,000. If your partner, or another family member or friend, buys your £10,000, then the house will not be sold.

It is important that you don’t sell your home, or give away your home, before, or during, bankruptcy. An Official Receiver will see this as an attempt to hide your assets and finances and it is considered a ‘Bankruptcy Offence’. This can result in a bankruptcy restriction being made against you, which is a financial limitation that can last up to 15 years, or you could be sent to prison. You cannot avoid selling your ‘beneficial interest’ at market value.

If you have family or dependents, such as children or vulnerable adults, living at your home, it is possible to delay the sale of your home until the end of bankruptcy to allow you time to find alternative living arrangements.

The Official Receiver has three years to try to sell your beneficial interest. This means that they can check the amount of equity in your home up to two years and three months after the bankruptcy process began. If they ever find that your ‘beneficial interest’ is more than £1,000, you might need to sell your home, or have someone buy your share.

Your Rented Home

Bankruptcy should not directly affect your rented home. There are some instances, however, where you can be affected, such as:

  • If you benefit financially in any way from your tenancy agreement
  • If your tenancy agreement prohibits bankrupt people from living there

Rent and Mortgage Arrears

While rent arrears can be included in your bankruptcy, mortgage arrears cannot but, either way, having rent or mortgage arrears, which are missed payments on your rent or mortgage, can put your home at risk even if you have no equity. This is because your landlord or mortgage lender might lose faith in your ability to pay the arrears and your future payments and so choose to repossess your home or evict you. By having rent or mortgage arrears, you are giving them grounds to evict you.

If you have rent or mortgage arrears, bankruptcy might not be for you. You may want to look into alternative housing, such as with a relative or friend, in preparation for if the worst should happen.

Homelessness

Unfortunately, this all means that sometimes bankruptcy can result in homelessness. If you worry about this happening to you, you can contact your local authority to see if you are eligible for help. They could be able to re-house you.

Occasionally, local authorities are not able to help, however, if you have sold your home in an attempt to prevent bankruptcy. This can be perceived as your decision, and thus you are seen as intentionally homeless. It is advisable to make sure you have alternative housing before you sell your home, or to remortgage your home rather than sell it. It is still worth speaking to your local authority before you take any steps, as their policies could vary.