Should I Get My Property Repossessed and Declare Bankruptcy?

Q.

I am currently half way through an IVA and have been fighting debt problems for 7 years now trying to make an effort to repay the people I owe money something back rather then going bankrupt.

I have a mortgage and a secured loan and I am about £30,000 in negative equity. I have now lost my job and have no way of earning the income I need to service my outgoings. I am now at a point where I can't fight anymore and want a normal life again. I am thinking about getting repossessed as I cannot afford my mortgage and secured loan. My question is, am I better off getting repossessed first then with the shortfall of negative equity becomming unsecured go bankrupt and clear that shorfall and my IVA.

A.

Individual Voluntary Arrangements (IVAs)

An IVA is a binding agreement reached between a debtor and his creditors. The creditors agree to accept payments from the debtor which may present the whole of the debt owed or just a portion of it.

IVAs are usually supervised by an insolvency practitioner who generally has a duty to seek a bankruptcy order against the debtor if he fails to keep up with the terms of the agreement. If you have already stopped – or are going to stop - making contributions to your IVA it is, therefore, possible that the supervisor of your IVA will petition for your bankruptcy before you have the chance to do so.

Repossession

Borrowers usually have to miss at least two payments before secured lenders start the repossession process. However, recently the government has been encouraging lenders to take a more lenient approach to mortgage arrears. Some lenders are also reluctant to repossess properties that may prove difficult to sell.

If you wait for one of your lenders to start possession proceedings it is likely to be at least about three months from when you are two months in arrears before a possession order is made.

The usual rule is that, if a property is in negative equity, borrowers remain liable for any shortfall after the property is sold.

Bankruptcy

Declaring oneself bankrupt is a serious step but it can be a chance to wipe the slate clean and debtors may be discharged from bankruptcy within a year. However, declaring bankruptcy is quite expensive. A court fee of £150 is usually payable in order to petition for one’s own bankruptcy and a £345 deposit must also be paid. People on some benefits may be exempt from paying the court fee.

It is also worth remembering that all of your bank accounts will be frozen, that it could be very difficult to open a bank account or get credit in the future and that discharged bankrupts are barred from some jobs.

There may be a forced sale of a bankrupt’s home if there is no other way of paying the costs and debts of the bankruptcy.

Negative Equity, Mortgage Shortfalls and Bankruptcy

The issue of mortgage shortfall debts and bankruptcy is fairly complicated. Technically bankruptcy only covers unsecured debts incurred prior to the bankruptcy order. Timing is crucial with bankruptcy and the bankruptcy order includes the precise minute at which it was made so that it is clear whether a debt was incurred before or after the bankruptcy.

If a property is repossessed or surrendered before a bankruptcy order is made it is likely that any subsequent shortfall will be an unsecured debt covered by the bankruptcy. However, confusion arises because the shortfall may not be realised until after the bankruptcy. Anyone who becomes bankrupt and believes that their property may be repossessed should ensure that the Official Receiver is notified of the situation as soon as possible.

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