Can I include my mortgage debt if I go bankrupt?
6 July 2012
By James Falla (about the author)
If you are planning to declare yourself bankrupt and you are a home owner we ask whether or not you can include your mortgage debt in your bankruptcy.
For many people bankruptcy can be an ideal solution to resolve a personal debt problem despite the largely unfounded stigma that surrounds it.
If you have decided that bankruptcy might be for you, one of the key things you will need to understand is whether you can include your mortgage debt in your bankruptcy
The general rule is that you can only include unsecured debts in bankruptcy. Secured debts are not included. Because a mortgage is secured against your house this debt cannot normally be included if you declare yourself bankrupt.
Given this we investigate what happens to your mortgage if you go bankrupt and whether mortgage debt can ever be included in bankruptcy.
Continue reading below...
How do I continue paying my mortgage in bankruptcy?
Given that your mortgage is a secured debt it will not be included as a debt in your bankruptcy.
This means that you will have to keep paying your mortgage payments each month even while you are bankrupt. If you do not then your house will be at risk of being repossessed.
They way you keep up your mortgage payments is that they are included in your list of allowed living expenses. You will always be allowed to make these payments from your income before you have to pay anything towards the debts included in your bankruptcy.
In this sense, going bankrupt will actually make it easier for you to pay your mortgage as you no longer have to use your mortgage money to pay your other unsecured debts.
Will my house be at risk once I am bankrupt?
One of the main concerns raised about bankruptcy is that it might mean that you will have to sell your house. However in reality this will often not be the case.
The question of whether your house is at risk or not if you go bankrupt revolves around the amount of equity if any that there is in the property.
If you know that there is little or no equity in your property or there is negative equity, then it is very unlikely that you will have to sell your house and you will be able to keep it after you go bankrupt.
In these circumstances, if you want to keep your property then you must make sure that you keep paying your mortgage. This will be your responsibility out of your allowable living expenses budget.
If you do not keep up with your mortgage payments your house will be at risk of repossession by your mortgage lender even though you are bankrupt. Bankruptcy does not give you any protection from this.
What if there is a lot of equity in my property?
If you have a lot of equity in your property then the decision to go bankrupt in the first place has to be taken very carefully.
The rule that you have to continue paying your mortgage still stands. However you will also need to understand that there is a high possibility that you might have to sell your property to release your equity so that it can be used to pay your unsecured debts.
For this reason you might feel that continuing to pay your mortgage is simply pointless and you will decide to sell your property straight away.
If the property is jointly owned, the other joint owner will be able to keep their half of the equity if the house is sold. For that reason you might decide to keep paying the mortgage and wait to sell until you can get the best possible price for the property.
On the other hand, if you are the sole owner of the property, all of the the equity in the property will have to be paid into your bankruptcy. As such there is nothing to protect and you might decide to sell immediately or even stop paying the mortgage and allow the property to be repossessed if an easy sales process is not possible.
What if my house has already been repossessed?
If your property is repossessed, it will be sold by the mortgage company. If after the sale there is a mortgage shortfall which you are still liable to pay, this debt then becomes unsecured.
Because it is an unsecured debt a mortgage shortfall debt after repossession can be included if you declare yourself bankrupt.
If you have already gone bankrupt but then you decide that you cannot afford to pay your mortgage, you could stop making the payments altogether and allow your house to be repossessed. Any mortgage shortfall once the house is sold is still included as a debt in your bankruptcy even if you have already been discharged by the time the sale happens.
If you are the sole owner of the property it is likely that you will stand to gain nothing from the sale of the property as all the equity will have to be paid to the official receiver.
As such rather than going through a drawn out sales process during which time you are still required to pay your mortgage, it may be easier for you to simply move out of your property, allow it property to be repossessed and then let your official receiver deal with any equity or shortfall after the sale.
Consider bankruptcy carefully
If you are a homeowner, the decision to declare yourself bankrupt should not be taken without first getting expert advice.
If you believe bankruptcy is right for you, you need to understand that you will have to continue paying your mortgage payments even after you have declared yourself bankrupt.
The only time when this is not the case is if your home has already been repossessed and you have a mortgage shortfall debt which is automatically included in the bankruptcy.
Alternatively you could stop paying your mortgage if you have decided to allow your property to be repossessed.
Arrange a call with a Bankruptcy Expert