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Tackling your debts

Can interest continue to be charged on a secured debt during bankruptcy

Posted 20 March 2013

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During bankruptcy, interest could still be charged on secured debt, find out why here

The answer to the question is simple – yes, your lenders can continue to add interest to your secured debts during your bankruptcy. This may be a different answer to what you’ve heard about debt solutions meaning that the interest on your debts is frozen. So, let’s look into this is a little more detail.

But, before we move on, a couple of points. This advice is for people in England, Wales and Northern Ireland. If you live in Scotland, we have a range of debt solutions available, you can read about them here. And, if you already have problem debts, that you’re struggling to pay, it’s best to speak to a trained debt advisor. They’ll go through your finances to find out which debt solution would be the best way forward. You can speak to one of our trained debt advisors by clicking one of the ‘contact us’ links on the left of the page. 

Right, let’s carry on with bankruptcy and interest. If you feel your debts have become unmanageable, one of the solutions you may be eligible for is bankruptcy, and if you’re a homeowner or you have a car on hire purchase (HP), you may want to know what happens to these secured debts when you enter into bankruptcy.

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What is secured and unsecured debt?

First, let’s have a look at what a secured debt is. A secured debt is anything that required you to pledge an asset, which means you promise to give something you own, as payment for the debt, should you fail to make your payments. The most obvious example of this is your mortgage. You buy your home with a loan, the home then becomes the asset you use to secure your loan. So, if you stop making your monthly payments, the mortgage provider, after making all possible attempts to resolve the situation, would take action to have the house repossessed. More than likely, the property will then go on the market, so the mortgage provider can recoup some of the money they lent to you to buy the property in the first place.

The other type of secured loan is a Hire Purchase or HP agreement. These are what you might use to buy a car. They work in pretty much the same way as a mortgage, in that the lender of the money will repossess the car and sell it to make back some of what they owe, if you’re not able to keep up with your monthly payments.  

The upside to secured lending

However, the upside to securing your lending is that the interest rates are usually lower than they are if the lending is unsecured. Unsecured debts are all the other lenders you borrow money from, like credit cards, store cards and personal loans. These are not secured against anything, which makes them a bigger risk for lenders because if you’re not able to keep up with your payments, the only recourse the lender has is to pursue you for it – there’s nothing to repossess. This recovery process will take time and adds additional costs for the lender.  

If you think that you may need a debt solution to help you get your problem debts back under control, it’s probably time to speak to a trained debt advisor. You can use the ‘contact’ us buttons on the left of the page to start sorting your problem debts today. 

So, what happens to the interest on a secured loan, if you decide to enter into bankruptcy?

When you enter into bankruptcy and you own your home, you may be asked to sell it if there’s any equity, which basically means money tied-up in it, that you could put towards your bankruptcy. If this is the case, it’s really not a concern whether you’ll be charged interest or not as you’ll no longer need to make payments, because you won’t own the property.

Exceptional circumstances

However, there are some instances when you may be able to keep your home, even if you are made bankrupt. This might happen if the equity in your home is worth less than £1000, or you’ve had significant adaptations carried out on your home. This could be to make your home accessible for a disabled child or a partner suffering from an illness, for example.  

Your mortgage becomes more affordable

If you do keep your house when you enter into bankruptcy, you should find that your mortgage payments are far more affordable anyway. This is because all your essential bills, including your mortgage, will be taken into account in your monthly budget. So your mortgage will be paid before anything else is paid into your bankruptcy. And this is the important bit – the interest will continue to be added to this debt, as it would normally.

If you have items that you’ve bought on hire purchase (HP), that you’re allowed to keep, such as a car that’s essential for your work, you’ll continue to pay interest on that too. This is because the interest is agreed at the start of the arrangement, the same as a mortgage, rather than it being added monthly, like it would be on a credit card.     

So, there you have it – lenders can still add interest to your secured debts when you’ve been declared bankrupt.

If you have any other questions about any of the debt solutions available, please don’t hesitate to contact us using the buttons on the left of the page. 

by Shelley Bowers

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.