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Tackling your debts

Will I lose my home if I declare myself bankrupt?

Posted 06 October 2015 by Christine Walsh

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Being made bankrupt is a stressful time, without worrying about losing your home too. Find out the facts here.

If you own your home and you’re thinking of going bankrupt, you may want to look into how likely you are to lose it before you make any decisions.

Owning a home is one of life’s big ambitions for many people. And once you’ve got one, you’re not likely to want to let it go again. But, if you find yourself with problem debt and feel bankruptcy might be the way to go, what happens to your home?

Why will I lose my home? 

When you apply for bankruptcy, you will be expected to pay back as much of the money you owe as you can. So, if you are the legal owner of the house you live in, the official receiver (OR), that’s the person who deals with your bankruptcy, may ask for it to be sold. To do this you’ll have to give up what’s called your beneficial interest, we’ll explain this in more detail below, and transfer legal ownership to your trustee. The proceeds of the sale will then be put towards paying your debt. This applies regardless of whether your home is owned entirely by you, jointly with another person, freehold or leasehold.

However, after saying this, there are some times when you may not need to sell it. We’ll go into these below in more detail as well, but first…

 A warning!

If you’ve decided to declare yourself bankrupt and you think you might lose your home, you must not try to sell your house for less than it is worth. And you can’t get around this rule by giving your house away either. The OR will see this as an attempt by you to prevent the house being sold by them, and the money tied up in the house being used to pay off your debts. It is a bankruptcy offence and could land you in hot water as well as getting you slapped with bankruptcy restrictions, which are likely to make your life harder, for longer.      

 Is there any way to stop the sale of my home?

You can, potentially, stop your house from being sold by selling what’s called your ‘beneficial interest’, to your spouse or partner or another relative who can buy you out. Your beneficial interest amount is what your share of the property is worth. But it’s not the same as the value of the house if you were to sell it.

Instead, it’s worked out based on what the house is worth, after everything that’s owed on it has been paid. So, if you have a £100,000 house and you have £40,000 left to pay on your mortgage, this amount would be deducted from the £100,000, leaving a value of £60,000. There may also be secured loans attached to the home, and these would also have to be deducted.   

 Sole owners

If you are the sole owner – you own it all by yourself – your beneficial interest is 100% of the value, with any mortgages or secured loans taken off the total amount. From the example above your share would be £60,000.

Joint Owners

If you only own a share of the house, your beneficial interest will be the sum the house is worth after taking off the loans and mortgages, which is then shared between you and the other owners. So using the example above, if you shared ownership with your spouse, your beneficial interest is £30,000, because the £60,000 is split between you both.      

Low Value

If your beneficial interest is worth less than £1,000, you will not be asked to sell it. This can often happen when your home is in negative equity, meaning your outstanding mortgage is bigger than the current value of the property. If this happens to you, your situation will be reviewed two years and three months after the bankruptcy order is made to see if it’s changed.  

Re-mortgaging

Before deciding to declare yourself bankrupt, you may want to see if you’re able to re-mortgage your home and instead use that money to pay off some of your debt, keeping you out of bankruptcy. However, you need to be sure that you can make the repayments on the new mortgage, or once again you will be at risk of losing your home, this time through repossession.

It’s worth bearing in mind that if you are on the verge of bankruptcy, the chances of you securing a new mortgage may be slim and, if you do, it may well be expensive. This is because if you’re in the position of needing to declare yourself bankrupt, you’ve probably already been making part payments, paying late or missing payments altogether on your credit commitments.  These will show on your credit history, and may make other lenders nervous about lending to you.

Time limit

If the OR decides they want to sell your house to help pay off some of what you owe, there’s a three year time limit on them taking action. During that time, they’ll have to choose to do one of the following:  

- apply to the court for a charging order,

allow you to sell your beneficial interest to someone such as your partner, family member or friend,

- apply to the court for an order to get you, or anyone else living in your home, to leave the property,

- come to an arrangement with you that you’ll pay the OR the amount of your beneficial interest.

If they fail to take any action within the time limit, the beneficial interest becomes yours again. However, the chances of the OR taking no action during this time are pretty non-existent, we are just including this information for completeness.  

We hope you’ve found this useful and it’s made the world of bankruptcy a little clearer. If you’re still unclear, it’s best to talk to someone, before you decide on anything. You can get free, impartial advice from the Money Advice Service.  Or you can call, live chat or email us and we’ll do our best to help you.

All debt solutions come with pros and cons. You can read more about how bankruptcy will affect you here

by Christine Walsh

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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.