The truth about bankruptcy
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Secured debts work differently to unsecured debts in debt solutions – find out how here.
For homeowners, secured loans (also known as second charge mortgages) can be attractive as they typically attract a lower rate of interest than most unsecured personal loans. If you’re not sure what a secured loan is, it just means a loan that is ‘secured’ against something else that you own. This is usually your home but it can also be a car. If you don’t keep up with secured loan repayments, the lender can repossess the property and sell it to get back what you owe.
But if you’re struggling to afford secured loan repayments, could a debt solution help? Will you be able to add these loans into a Debt Management Plan or an IVA, for example? Let’s find out what your options are.
Can you include secured loans?
Debt solutions are only for unsecured debts – you can’t include secured loans. So you’re fine to include any store cards, credit cards, payday loans or catalogue debts but you couldn’t add in any secured debts, like a mortgage. The only time you could do this is if you didn’t have the property any more – for example, your home was repossessed and you were looking to add in the mortgage shortfall.
The reason for this is because when you enter a debt solution, you won’t be repaying what you owe in the same way you originally said you would when you first took out the credit agreement. If you start a Debt Management Plan (DMP), you’ll repay less each month and with an IVA, you’ll also have some of your debt written off. This means you’ll break your original credit agreements.
If you break your credit agreements for a secured loan, the lender will start the process of repossessing your property. This means you could lose the property the loan’s secured on – whether that’s your home, your car or white goods – so it just wouldn’t make sense to include secured debts in your debt solution.
Can debt solutions help?
But don’t worry – that doesn’t mean a debt solution can’t help if you’re struggling to afford secured loan repayments. When you’re setting up a debt solution, your debt advisor will put together an income and expenditure sheet for you. This will include everything you’re bringing in – whether that’s earnings or benefits – and all of your essential bills and expenses.
Your secured debt repayments will be included as an essential bill in your income and expenditure plan. This means you can still keep up with your secured loan payments while you’re on a debt solution as you’ve already budgeted for them. Your other lenders will accept this because if you missed your secured loan payments or only paid a smaller amount towards them, you could be at risk of losing your property.
When you’re on a debt solution, your property shouldn’t be at risk, as long as you keep up-to-date with your secured loan repayments and your mortgage. In fact, if you were struggling to afford secured debt payments before, a debt solution could make this easier. This is because the money for your secured loan repayments is set aside before any payments for your debt solution are calculated. That means you should be able to afford to repay them in full.
Secured loans and bankruptcy
If you enter bankruptcy, your unsecured debts are written off when you complete the solution. If you can afford to, you might have to pay into an Income Payment Agreement (IPA) for up to three years but you won’t be in debt.
Your secured loans work a bit differently though. This is for the same reason that we already explained – if you stopped paying your secured debts, the lender would repossess your property.
But if your mortgage lender has already started the process of repossessing your home, the money they get from the sale of this will first go towards paying off what you owe to them. If there’s any left over, this will go towards your other secured debts.
And if there’s not enough money to clear your secured debts and your property has already been repossessed, the shortfall can be included in your bankruptcy. This means that after your bankruptcy has ended, you won’t still be left with the secured loans or mortgage shortfall – your bankruptcy will clear them like other debts.
One way that bankruptcy differs from other debt solutions is that the Official Receiver or trustee can sell your property. They would only do this if it would benefit your unsecured creditors though. If they did repossess your home, your secured debts would be paid off first and the surplus would go into the bankruptcy estate to pay your other creditors.
What to consider
When you’re considering which debt solution is best for your circumstances, your debt advisor will take any secured debts into consideration. They’ll always make sure you have enough to cover these repayments before any other, as it’s important you don’t put your property at risk.
If you’re looking for support with your debt problem, you can get free and impartial information from the Money Advice Service. You can also get in touch with our debt advisors using any of the options to the left of the page. They’ll look at all aspects of your situation – how much you’re bringing in and how much you owe, as well as your secured debts – before they tell you which solution is best suited to you. And don’t worry – even though you might not think there’s a way through your problems, a debt advisor will always be able to help you find a path back to financial security.
by Emily BancroftBack to blog home