Going bankrupt - what happens to negative equity?

thinkpositive1

I would welcome advice / thoughts from anyone who could shed light on the implications of bankruptcy and if this really is a better option for me than trying to maintain my IVA and my house (which I now rent out but is in negative equity). I want to have all the facts in front of me before I decide what to do but having read up on loads of info and spoken my IVA company, my mortgage lender and others it seems impossible to get advance and definitive warning or advice on all I want to know about the impact of BR.

In brief my circumstances are:

· I am self employed and my income has fallen quite significantly (down to about 50% of what it was 3 years ago) and become more erratic making it hard to guarantee what income (if any) I will have each month and almost impossible to plan a budget ahead with any certainty.

· I own a house which, since I moved in with mypartner last summer, I have rented out. The rent is welcome “fresh” and regular income but only covers about 40% of the mortgage.

· The negative equity on that house is, I estimate,some £25K to £30K. I have an IVA and have maintained this for 3 years but am now struggling.

I have a host of questions but will focus on 2:

Q1: If you have a house in negative equity and “hand the keys back” / go bankrupt or get repossessed what happens to the shortfall? I have been trying to hang onto the house (as a longer term asset, as I have little pension provision but also as there is no equity there was no point selling it as it would give me another big debt) and am really worried my mortgage company will give me a huge new bill to pay to cover the shortfall.

I read somewhere that a shortfall is treated as an unsecured debt. If so and if I could maintain my IVA, could this be then considered to become part of a revised IVA plan (bearing in mind I only have 2 years to go on the IVA as it stands)?

Is it written off? Or is it treated as a priority debt to be met by monthly payments over (how many????) years until it is cleared? I have read up on what I can on the IPA process.

Q2: IPAs. Is the income / expenditure assessment similar or much harsher than say an IVA budget plan when it comes to becoming bankrupt and assessing what gets paid for 3 years? Is this kept under review annually? Is it definitely put in place for years and then you really are in the clear?

Is it 3 years from the point of being discharged?

So many questions...my apologies!

Whilst not perfect at least I know with my IVA what I will be paying for the remaining 24 months and what worries me about BR is that an IPA would last a year longer then my IVA is due, my credit file will not be clean for 6 years, 3 years more than it would if I could maintain my IVA.

Any advice on these 2 main issues would be welcome.

To go BR seems like I have finally “given up” as I have tried to do the right thing all along – a DMP for 2 years then and IVA for 3 years so far.....but I am getting sick and tired of the worry and stress. As my partner would say, BR maybe best seen as a fresh start and my plan needs to be based on what is affordable and give us a less stressful life looking ahead.

Happy to give further details but I am conscious I have already probably written too much! I am trying to look at everything rationally rather than emotionally but feel totally dragged down by the recent business knock backs I have had. Everything could pick up well again soon but I cannot guarantee my income for the next month let alone 3 - 6 months or more.

longtermplanner

thinkpositive1 wrote: »

I own a house which, since I moved in with mypartner last summer, I have rented out. The rent is welcome “fresh” and regular income but only covers about 40% of the mortgage. [/SIZE][/FONT]
...
The negative equity on that house is, I estimate,some £25K to £30K ...
If you have a house in negative equity and “hand the keys back” / go bankrupt or get repossessed what happens to the shortfall?

Trying to hang onto that house is pointless. It is a millstone around your neck if the rental gives you a massive shortfall each month on the mortgage. And it is so deep in negative equity that even the most optimistic person shouldn't think of it as a 'long term asset'.

If you go bankrupt, stop making the mortgage payments. It will then be repossessed. The mortgage debt will form part of your bankruptcy and you will not end up owing the shortfall when it is eventually sold.

I read somewhere that a shortfall is treated as an unsecured debt. If so and if I could maintain my IVA, could this be then considered to become part of a revised IVA plan (bearing in mind I only have 2 years to go on the IVA as it stands)?

Secured debts cannot be included in your IVA. Unsecured can, but the shortfall will not be established until the house is first repossessed and then sold. This is not a quick process, it may well take a year or more and the timescale will be completely out of your hands. At that point, with so little time to go on your IVA I would guess that your IP is unlikely to put forward such a major variation of your IVA. Sorry but I can't see this alternative working.

Is the income / expenditure assessment similar or much harsher than say an IVA budget plan when it comes to becoming bankrupt and assessing what gets paid for 3 years? Is this kept under review annually? Is it definitely put in place for years and then you really are in the clear?

If an IPA is set, it will be for 3 years. The amount can be reviewed whenever there are significant changes in your income or expenditure. It is more flexible than an IVA. The following link gives specific figures for things like food, clothes, phone etc http://mymoney.nedcab.org.uk/moneyadvice/ipaipo.asp These are figures that will not be queried by the Official Receiver. If some of your costs are more, you can explain why and they may be accepted.

Your debts are written off when you go bankrupt.

Whilst not perfect at least I know with my IVA what I will be paying for the remaining 24 months and what worries me about BR is that an IPA would last a year longer then my IVA is due, my credit file will not be clean for 6 years, 3 years more than it would if I could maintain my IVA.

All good points! This is now a difficult decision.

However you say you are struggling with your IVA and in bankruptcy the BTL negative equity gets sorted.

As my partner would say, BR maybe best seen as a fresh start and my plan needs to be based on what is affordable and give us a less stressful life looking ahead.

Talking to your partner is good Less stress is good Sometimes the best way forward may not be the one that is optimal financially, if an alternative will be better for your family.

bigjl

If you have a secured loan or mortgage on a property priot to BR you continue to service the debt but no longer own the beneficial interest if the property was to be sold or repossessed.

If the house is later repossessed then the mortgage or secured loan taken out prior to BR then becomes unsecured and is included in the BR

This is why the mortgage co will try to get you to sign a dead of acknowledgement so you accept responsibilith for the debt.

If you have negagive equity and are unlikely to ever get out of NE then let the house go and start again.

Property prices will nosedive again in 2016 when interest rates rise back to a sustainable level and the repossessions delayed by the low interest rates occur.

Let the house go an aim to buy something a lot cheaper in 2016/7.

alastairq

Property prices will nosedive again in 2016 when interest rates rise back to a sustainable level and the repossessions delayed by the low interest rates occur.

gosh, that almost matches my own voiced assertion that unemployment [esp. those claiming JSA, or whatever its called these days?] will be shown to have risen agin for the current quarter......after all those many thousands who were hired part -time, etc to cover the Xmas period, are laid off come January? [which wont show for the last quarter?]

thinkpositive1

bigjl wrote: »

If you have a secured loan or mortgage on a property priot to BR you continue to service the debt but no longer own the beneficial interest if the property was to be sold or repossessed.

Thanks for your response. I didn't quite understand the first bit - "continuing to service the debt"?

If I go down the bankruptcy route is it best to just stop paying the mortgage and await action (repossession) from the mortgage lender?

alastairq

I didn't quite understand the first bit - "continuing to service the debt"

means, continuing making the payments on it.

If the intention is to divest yourself of the property, then simply cease paying hte mortgage [and the secured loan too?]

The mortgagor will take responsibility for the tenant eventually [do you have the mortgagor's permission to let the property out?]....

The time/date of the eventual BR petition really doesn't matter as far as shortfall is concerned.

arcon5

thinkpositive1 wrote: »

Thanks for your response. I didn't quite understand the first bit - "continuing to service the debt"?

If I go down the bankruptcy route is it best to just stop paying the mortgage and await action (repossession) from the mortgage lender?

In a word, yes. They'll seek possession much quicker. Assuming the tenants leave quietly... it's a massively expensive affair moving house, so some may not. Depends if you continue to take rent off them I suppose.

If you go BR - -do NOT sign ANY documentation they send you.

longtermplanner

thinkpositive1 wrote: »

Thanks for your response. I didn't quite understand the first bit - "continuing to service the debt"?

If I go down the bankruptcy route is it best to just stop paying the mortgage and await action (repossession) from the mortgage lender?

Absolutely. You don't want to keep these secured debts alive because the rent shortfall is huge. So stop paying them and wait for the house to be repossessed.

gunner172

I went BR 5 years ago I have various creditors all unsecured bar one I struggled with it went from car finance to secured loan..welcome finance!! not sure who or where they are now but I did put them in my BR along with everything else.. I also have a house that was in negative, 3 years later I got letter saing house back to me and no interest in it.. never heard of welcome so unsure if it was secured or if they went under and never chased me I know I put it on the sheet along with letter of them saying secured loan.. strange!

bigjl

If the loan was secured on the property and you still own the property then the secured loan will still be secured as a second charge and you need to check it out sooner rather than later.

As interest and charges will be accruing.

Welcome have gone bust apparently but i was told the outstanding loans are or have been sold on.

Being a second charge i don't think it is easy or even possible for them to force a sale.

But they will be entitled to a share of the house sale.

You need to check with the Land Registry i believe

MTDancer

Bankrupt Jan 2011, discharged Jan 2012.
we had a house that was rented out and when we went bankrupt NRam put it in the hands of their own receiver. The rent easily covers the mortgage and management company and the house is in negative equity.
We have no beneficial benefit in the house and the mortgage still shows on our credit reports but Nam will not sell it.
I hate that it is still on our credit reports but I suppose it looks good that it is up to date. I do not know what NRam intends to do when it is no longer profitable.
We have never signed a dead of acknowledgement and never will.