Mortgage Shortfall and Bankruptcy

James Falla

• 23 Nov 2021

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

Jump to article contents:

• What is a Mortgage Shortfall?
• Can this debt be written off by Bankruptcy?
• Do you have to wait until the property is sold?
• Are there alternative solutions available?

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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.