What happens to my home equity if I go bankrupt? 13 July 2010
Steven Jackson (about the author)

If you are declared bankrupt, any significant assets that you own should be sold to pay off your debts. We investigate what happens if you are a home owner and there is equity in your property.

Bankruptcy is generally seen as a last resort for dealing with debt. If you declare bankruptcy, all of your unsecured debts will be taken away from you and you are no longer responsible for paying them.

However, being released from your debts comes with a price. If you have any valuable assets (other than normal household items) you will generally have to sell these so that some or all of your debt can be paid.

As such, if you are a homeowner and there is equity of more than £5000 in your property, then it is almost certain that this will have to be realised for the benefit of your creditors.

Equity can be released in different ways

If you are the sole owner of the property, 100 percent of the equity will be available for your creditors. This can be released from the property in two different ways.

Firstly, the house could simply be sold. The official receiver (OR) who manages the bankruptcy cannot force you to sell for 12 months. However after this time, they could ask the court for an order of sale to compel you to sell.

Secondly, a third party (often a family member or friend) could offer the official receiver a cash lump sum to effectively buy your equity from them thus avoiding the need to sell the house.

In this way you could remain in the property and agree to repay the debt privately after your bankruptcy finishes – normally after twelve months.

What happens to joint equity

If you own the property with someone else, then any equity would normally be seen as being owned jointly with them. As such if there is £50,000 of equity in a jointly owned property, then each party is seen to own £25,000 of the equity.

In the event of your bankruptcy, your creditors would therefore only be entitled to half of the equity in your property.

If the house was sold, after costs of sale have been deducted, your half of the equity would be taken by the official receiver and distributed to your creditors. The other half would be given to the other joint owner.

In this situation, it is common for the other joint owner to make an offer to the OR to buy your half of the equity to prevent the house from being sold.

If the other joint owner cannot raise the required funds or simply refuses to leave the property, the official receiver can still apply to the court for an order of sale after twelve months.

The court will normally allow the sale on the basis that the joint owner will benefit from the sale and will normally be able to find reasonable alternative accommodation nearby if required – even if this is rented.

Someone else paid the deposit

There may be a situation where a third party paid the original deposit when you bought the house. Very often this could be the other joint owner who invested in the property after the sale of their previous home or another family member.

Where this is the case, the person who paid the deposit can often claim that the money was simply a loan. In these circumstances, this would be paid back before any remaining equity is made available for the official receiver.

Bankruptcy is a very serious matter particularly if you own a home.

If you are a home owner and there is equity in your property, the official receiver has a duty to realise this equity for the benefit of your creditors.

This does not necessarily mean that the house will be sold. However, unless a third party is able to make a reasonable payment to buy the equity, selling the property may be the only option for the official receiver

Such a sale will generally be supported by the court. As such getting the right advice well in advance about the options for any property is vital.

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