Going bankrupt: will you keep your house?

Homeowners going bankrupt dread that they'll lose their house. For many of them their worst fears are realised and they do lose their properties; however others keep theirs. How is this decided?

I’ve recommended property owners go bankrupt many times over the years. The first question they ask, almost without fail, is “Will I lose my house?” 

As with most things to do with insolvency, the answer’s a little bit complicated…

Beneficial interest – what’s that?

An important factor on whether you’ll get to keep your property in bankruptcy is whether the Official Receiver (OR) - the person appointed by the courts to investigate your finances - thinks you’ve got any ‘beneficial interest’.

Beneficial interest is calculated by:

• Taking the value of the property
• Deducting outstanding secured debts (mortgages and loans)
• Dividing the remaining equity (if any) to calculate your share

That’s your beneficial interest.

I’ve got beneficial interest in a property – what now?

If the OR thinks you’ve got beneficial interest they’ll want to get this money to spread between your creditors. They’ll give you two options:

• Arrange for someone to give the OR the money to ‘buy’ the beneficial interest
• Sell the property to raise the money

The courts are only interested in raising the money to spread between your creditors. So if you’re lucky enough to know someone who can help, the OR will be happy to take a cash lump sum instead of selling the property, so you don’t lose your home.

It doesn’t always matter if you’re named on the deeds or not

As a side note, you can be deemed to have beneficial interest even if your name isn’t listed as an owner of the property. While some might not think this is fair, the OR will determine your beneficial interest based on how much they think you’ve contributed towards the property.

This can get complicated if you’ve moved into a property that’s owned by your partner and you’ve always paid towards the bills. Having a tenancy agreement in place from the start helps, but few people do this when they move in together.

What happens if you do lose your house after bankruptcy?

If you’re unable to find someone to buy your interest in the property then the OR can apply to court for an order for sale. However, the courts can postpone an order for sale for up to 12 months to allow time for you to move out of the property.

What happens if you owe more than the property’s worth?

If the OR believes you’ve got less than £1,000 equity in your property you won’t have to sell at this stage. They are entitled to return at any time within two years and three months of your bankruptcy, to see if you’ve got any equity yet.

Assuming it’s what you want to do, if you’re in negative equity you’re often able to keep your property after bankruptcy. If you’re looking for a completely clean start following bankruptcy then it may be worth considering voluntary repossession, but make sure you take debt advice first!

High mortgage costs and bankruptcy

Following bankruptcy the OR will look at your monthly income and outgoings and if you’ve got the spare money they’ll ask you to make monthly payments of what you’ve got left over after paying your living costs (called an income payment arrangement).

If the OR thinks your mortgage costs are higher than renting would be in your area they’ll only allow you to budget for the equivalent cost of rent and increase your monthly payment to them accordingly. This can lead to having to pay out more than you can afford and risk falling behind with mortgage payments.

So there you have it. Not quite as simple as yes or no, but worth knowing. If you’re considering bankruptcy then use our online advice tool Debt Remedy to find out if it’s right for you. Or if you’d prefer you can give us a call and speak to a debt advisor.

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