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Mortgage Shortfall and Bankruptcy
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Mortgage Shortfall and Bankruptcy

Mortgage Shortfall and Bankruptcy

If there is a mortgage shortfall after your property is repossessed it will be written off if you go Bankrupt.

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What is a Mortgage Shortfall?

If your home is repossessed the mortgage lender will eventually sell the property. If the money raised from the sale is less than the secured debt owed there will be a mortgage shortfall.

You and anyone else named on the mortgage remain liable for this debt. If your mortgage was in joint names then both parties are 100% liable for its repayment.

A mortgage shortfall can commonly run into many thousands of pounds. If this is the case it is unlikely that you will have the funds available to pay it.

It may be possible to make a repayment agreement with a mortgage lender. However paying the debt off by a small amount each month could take an extremely long time.

Can a Mortgage Shortfall be written off by Bankruptcy?

Mortgage shortfall debt is unsecured. This is because the property that it used to be secured against has already been sold. As such if you go bankrupt the debt will be included.

Once you are bankrupt you do not have to make further payments directly to the mortgage company or towards any other debts that you owe. They cannot take further action against you to collect their debt.

If you have any disposable income you will be asked to pay this to the Official Receiver. However these payments will last for a maximum of 3 years. After this the shortfall debt will be written off.

Bankruptcy is a individual debt solution. If you go bankrupt only your liability will be included. Any other party named on the mortgage is not protected. They can still be chased by the mortgage company unless they also go bankrupt themselves.

Do you have to wait until your property is sold before you go Bankrupt?

If your property is repossessed it may not be sold by the mortgage lender immediately. In fact it is quite normal for the sale process to take many months or even over a year.

However you can go bankrupt straight away. You do not have to wait for the property to be sold and the exact amount of the mortgage shortfall calculated. When it eventually is any debt is then included in your original bankruptcy.

Even if the sale does not happen until after you are discharged you are still protected from the shortfall. This is because it is a contingent debt. It is included under section 382 of the Insolvency Act.

You can go Bankrupt straight away without having to wait for a repossessed property to be sold. You then get immediate protection from your other creditors. Any shortfall is included later.

Should you consider alternative options for dealing with a Mortgage Shortfall?

Although bankruptcy is a good way to deal with a mortgage shortfall you could also consider alternative options.

If you have access to a cash lump sum you might be able to agree to settle the debt with the mortgage company. If the offer is sensible they may well accept this.

Alternatively you could start an Individual Voluntary Arrangement (IVA). Using this solution could offer you benefits over Bankruptcy. You will be able to keep a more expensive car. In addition if you are a company director your job would not be affected.

An IVA will require you to pay towards your debt for 5 years. As such if you simply want get out of debt as quickly as possible Bankruptcy might be a better option for you.

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9 thoughts on “Mortgage Shortfall and Bankruptcy

  1. Christine says:

    Thank you for your reply I cannot move back to UK due to ill-health. Do you know anything about Spanish bankruptcy? Or can you suggest someone who does, please.

  2. Christine says:

    Hello, I moved to Spain 11 years ago. I have 2 buy to let properties in the UK. Both mortgaged and in negative equity. I am finding it very difficult to maintain the costs. I am a pensioner. Also, I have a mortgage on a Spanish property. Would my Spanish property be at risk? Which is my home.
    Thank you. Christine

    1. Hi Christine

      Unfortunately if you are now living in Spain you do not qualify to go bankrupt in the UK. You would have to move back to the UK and live here permanently for at least 6 months before qualifying. If you did choose to do this then yes you would have to declare your property in Spain and it would be at risk.

  3. Peter says:

    I have declared bankrupt in February this year my house has been repossessed and then sold in June and I recieved a letter from Halifax today telling me my mortgage shortfall is being passed on to moorcroft debt recovery can they do this and is it normally what happens

    1. Hi Peter

      As highlighted in the above article your mortgage shortfall is a contingent debt. In other words you were potentially liable for it when you went bankrupt and as such it is now written off by your bankruptcy in the same way as all your other debts were. You need to inform the official receiver that you now have details regarding the shortfall and they will deal with it for you.

      I would also advise speaking to Halifax and remaining them that you went bankrupt in February. As such they must cease all further collection actions against you and direct any further enquiries they have to the Official Receiver (or your bankruptcy Trustee if one was appointed).

  4. George says:

    I had a charging order put on property in 2009, went bankrupt in 2010. About to sell property now in negative equity. Official receiver said today I can do a voluntary repossession and the shortfall and charges fall under bankruptcy. Any advice if this is correct?

    1. Hi George

      The information you have been given by the Official Receiver is correct. Under section 382 of the insolvency act contingent debt is included in bankruptcy. Contingent debt is a debt you are potentially liable for on the date of your bankruptcy but which has not yet crystalised (for example a potential mortgage or secured debt shortfall).

      As such as long as you have not changed your mortgage since the start date of your bankruptcy and the property is now repossessed and there is shortfall on either the mortgage or the charge this is still written off by the original procedure (even through it was 9 years ago).

  5. Dan says:

    Hello. I was discharged in 2012 my trustee is still sorting my assets.

    I have 15 buy to let properties that are jointly owned with my ex wife. The mortgage finishes in 2025. The properties are in negative equity. The trustees wants to disclaim them out of the bankruptcy.

    If this happens am I jointly responsible for the mortgages? Even though my ex pays the mortgage at the moment?

    1. Hi Dan

      As they are secured debts the mortgages you have against your buy to let properties are not currently included or written off by your bankruptcy. However if your ex stopped paying them and the properties were repossessed any mortgage shortfall debts would then be included.

      This would happen because they have become unsecured. They are also what is known as contingent debts. In other words the possibility that you would become liable for them existed at the time you went bankrupt. As a result they are then written off by your original bankruptcy.

      You would simply need to inform the Official Receiver of the crystallisation of the shortfall and they would then be obliged deal with the mortgage lenders in question for you.

      Even if the Official Receiver disclaims the properties any potential mortgage shortfalls remain contingent debts. As far as you are concerned they would therefore still be written off if and when they happen.

      Note: Your ex is not protected by your bankruptcy. She would still be liable for any shortfalls.

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