Exploring bankruptcy - high earner

gglaze

Hi guys,

Firstly, apologies to others on this forum who are in a more dire situation than myself, and already dealing with bankruptcy as their last and only option; and I wish you all the best.

My situation is a bit complicated. In a nutshell, I earn a lot, and I spend a lot on credit, I have high revolving credit card balances, and I have a 300k mortgage in the UK. So far, all of this is easily manageable for me, and in fact I've been working through some of the higher-rate portion of my credit card debt already, and have probably reduced it by 20-30% this year. I should also mention a few special facts: I'm a US citizen, living in the UK on indefinite residency visa for the last 8+ years. And I am sort of self-employed - technically I'm an IT Contractor, working through my own one-person Limited Company - which I think is a fairly typical situation in the UK, so I imagine others here know what I'm talking about.

Now the bad part. Several years go I bought some properties in Poland through a (now defunct) UK company. I thought I had done my due diligence, and I was looking at it as a way to diversify my pension portfolio and have something besides bonds and stocks, which would hopefully either help pay my pension in the future or give me something extra to hand down to my children some day. Everything was fine for the first few years, and then when all the recession stuff kicked off, the investment got smashed, partly by property value going down, but mostly by the severe movement of the Swiss Franc over the last few years. It turns out, although I thought I was doing my proper due diligence, I had failed to fully understand the structure of the contracts I signed with the bank - particularly the bit about the mortgage (debt) value being tied to the Swiss Franc currency - as opposed to either British Pound, or Polish Slotzy or Euro, all of which would have turned out not so devistating. What I had failed to understand was that the mortgage structured in this way is actually massively leveraged on the FX rate and takes a huge currency risk. To give you an idea of what I mean, while the Swiss Franc value has remained constant (except for some reduction due to making repayments each month), the value of the debt in actual Polish currency (as the rental income is received) has gone from an original value around 1.75M to around 2.55M (+46%). In GBP terms (since ultimately that is what is relevant to me), it has gone from £374K to £494K (+32%).

The end result of all this is that the mortgage is costing me a huge amount out of pocket each month, beyond what the rent could cover now or in the forseeable future. For example, for the last accounting year the mortgage payments totaled almost £27K, of which £15k was interest paid, and the rest was repayment (but even the repayment is in vastly inflated currency figures). In contrast, the total rental income ranges from £5k-7k. The numbers will be worse this year, because there was still some relief from a 1-year agreement from the bank which ended last year.

So yes, it's an investment gone terribly bad, and a very poor decision on my part, or at least a mistake not to realise this aspect of the risk before I signed the contract. I've already heard all the arguments on the morality of sticking to the contract I've signed, for better or worse. In my defense, I would say that the bank did not do a tremendous job of explaining the risk factored into this type of loan. I feel sorry for the tens of thousands of Polish people who have similar mortgages and that is actually on the home where they live. Apparently these Swiss Franc-denominated loans are more popular than Polish currency loans in Poland. So, my intention was not to go out and make a huge currency bet - quite the opposite, it was to reduce currency risk by choosing what seemed to be the most popular option. Granted, it could have gone the opposite direction and worked in my favor, and then instead of a discussion about drowning in debt, I'd be sitting on a mountain of quickly earned cash.

So, this has been going bad for the last couple of years, and I've just shelled out the £2k from my own pocket each month to cover the mortgage and postpone the problem. But I've just about had enough - this can't go on forever - I can't spend the next 25 years losing the first £20k of what I earn to cover this loss. By the end of that, I will have lost an additional £500k that I could have otherwise saved. It's starting to seem like, whatever pain I might have to take for the next 7 years in order to go through bankruptcy, would work out better in the end for me than this.

I currently have a property in the UK on interest-only, and I doubt I have much equity in that, unless the market has recovered quite a bit since the downturn. I don't have much cash in the bank, I have a good £40k in UK debt, and I have £20k or so in my SIPP pension fund, which I suppose would have to get liquidated in a bankruptcy?

On the positive side, I earn enough (at least for now) to allow me to burn cash at this rate - but I am not saving much at all now - so it's pretty much everything that comes in goes straight out. I could probably continue this for a good while, but it's not going to help me rebuild my pension or nest egg or whatever, it's not going to help me buy a nicer house or support a family, and another jolt to the economy could easily set my earnings back to the point that I am no longer able to support this level of expenditure.

Also, there is the added point that, as I mentioned previously, I am a US citizen. Although they say the credit system is globally integrated, my experience has not really shown that to be the case. I have plenty of credit card debt left in the US too, but that never stopped me from getting more credit in the UK, and it doesn't even show up on my UK credit reports. I also understand that I could, for example, retreat back to the US, and live a fairly normal life, with normal finances, leaving my UK bankruptcy behind in the UK (and generally anywhere in the EU). I am under the impression debtors could not chase me back to the US very easily to get any assets I might have there, or any new income I am earning there. So my understanding is, I could basically wipe the slate clean in the UK and EU, while living out my next 7 years probation period in the US before I am able to come back to the EU (if I ever decide to) to get credit again.

My understanding about bankruptcy in the UK: although I have been told Poland does not actually have the concept of a personal bankruptcy (though businesses are allowed), Poland, being part of the EU, would have to respect the bankruptcy laws of the UK. So therefore, by declaring UK bankruptcy, I could wipe the slate clean in both the UK and Poland at the same time. On the other hand, I have heard from many Polish people that seem to have the opinion (accurate or not) that defaulting on a loan is basically considered a criminal act, and a defaulter would not only be pursued for the money, but also would go to jail if ever caught. Who knows if that's really true.

Would be very interested to hear anyone's thoughts on this. I'm sorry if it all sounds ridiculous coming from a high earner, but honestly I'm just like anyone else who made a mistake at a very unfortunate time, and would like to get this huge burden off my back and start over fresh. I'm not sure if bankruptcy is the right thing to be looking at, or something else. But I am open to ideas.

Of course I have already started to speak with my accountant about this and plan to have more serious discussions soon - but for now I'm still just trying to get a general understanding of my options and hear what people think.

Mouse1812

Don’t know anything about the polish angle. Suggest you find a solicitor with international knowledge on the matter, unlikely your accountant will know.

If you do go bankrupt and you will have to resign as director of your company and find someone to buy the company shares back off the OR. That could cause a few difficulties with your contracting work.

I would advise you sort that arrangement out first, I did.

As a high earner you will almost certainly (unless you become unemployed) end up with an Income Payment Agreement / Order (IPA / IPO) which will follow you back to the USA. This will restrict your spending somewhat as only necessary expenditure will be allowed, your surplus income will have to be paid into the bankruptcy for three years.

UK house and mortgage might be OK if you have family to support. Otherwise OR might refuse to accept mortgage payments in setting the IPA/ IPO when you could rent somewhere for less.

As a high earner you have quite a bit of preparatory work to do before entering bankruptcy. Your accountant might have limited practical knowledge of these matters and we don't see many on here earning like you do.

ps my mortgage is bigger

Worcsman

you could consider winding up your ltd company and using an umbrella company instead, perhaps using an employee benefits trust, that way your salary is only around 1k per month, you'd need to google it, the EBT's rightly get a lot of bad press but I know plenty of people that have been using them for the past few years without dramas. In fact I'm without doubt the lowest paid in my office and yet pay the most tax as all the rest are IT contractors like yourself. I was too for many years.
As for all the rest of it, without any knowledge of what is the best path for you to take, it does look to the layman like you have been proper chewed over. I have worthless property in Spain, or at least I did. Now the trustees have worthless property in Spain. Worthless is probably a bit unfair. Im sure they would get a few hundred quid for it on ebay.
I dont know how you being a US citizen would count on you beong able to go bankrupt here but I do know there is a very busy bankruptcy tourist industry in the UK as it seems we are very open to allowing people to escape their debts. The bonus for you being that your BR probably wouldnt follow you outside of the EU but would protect you within it.

wayforward_2

Mouse1812 wrote: »

ps my mortgage is bigger

hehe - mine too!

Best of luck op - i have no advice as no knowledge of this area but good luck unravelling it all.

dancingfairy

O.K so you owe
40k Uk debt
494k on Polish property

Have a uk pension 20k

Can you sell the Polish property at all? Would the bank allow you to crystalise your loss and set up a payment plan?
Best of Luck
df

gglaze

Hi, thanks - good questions.

The bank and properties being in Poland, and me not being Polish, always makes for an interesting time trying to go back to the bank to negotiate these things. Obviously like any bank they will likely do something to help mitigate their risk. But at the same time, there really does seem to be some kind of cultural gap in understanding, like as if to say "hey, we are Polish, we expect to go through life with some huge burden on our back, so should you"...and therefore to think it's absurd that I am trying to get out of my debt-ridden situation the "easy" way. I actually did go through trying to have my Polish laywers try to negotiate on my behalf last year, and they were not very successful, so that's why I've put this on the back burner again until now.

Interesting you mention the property value. I'd have to research it, but I'm fairly sure prices haven't moved upwards from where they were at the time of purchase - if I'm lucky they have recovered from the downturn and are back to the same level. So let's see, just a quick estimation - if my original LTV on these mortgages averaged around 90% (probably a bit less really), then we can conclude that, with a total original loan value around £374k, that gives us a total property value around £415k. Ok, so this is still quite a bit below the estimated £494k we have valued the debt at currently. But now that we look at it this way, perhaps it's not as bad as it seems. If this is even a bit higher - perhaps my LTV was closer to 85%, and imagine that we have had a 10% property value boost - that would put us up to £484k. So it's certainly possible the property could be sold, pay off most of the loan, and be left with some much smaller 10-20k debt to deal with finishing off.

This would be unfortunate in that it's a writeoff of my initial investment in this whole deal, which probably amounts to up to £100k all said and done - but I guess that's the way it goes. Also that's an interesting point - I think about £10-20k of that £100k was actually a "deposit" of some sort which is required on Polish mortgages to provide extra securing for them somehow - so perhaps even the remaining debt is covered and this thing could just wipe itself clean. Obviously I need to do some more research and understand the situation.

But at the moment, the thing that is killing me is the £2k out of my pocket every month, and the fact that this seems to just go on forever, so there's no light at the end of that tunnel. I guess this is just an imbalance between rental amounts and property values - the property could more or less be sold to wipe the loan clean, but the rent is barely making a dent - then isn't something wrong? Oh well, you've opened my eyes already, maybe I need to just try to cut my losses, sell this thing off, and get a plan in place to manage whatever debt is left over.

dancingfairy

Rather than having outgoings of 2k a month you could sell up and hopefully then have the 10-20k debt and the uk debt of 40k which could? possibly be manageable?
The hardest part is going to be getting the bank to let you sell and set up a payment plan/arrangement with them.
Personally I would consider this as a viable option.
df