Bankruptcy if you are a Homeowner
- 20 Nov 2021
If you are a homeowner you may think bankruptcy is not for you. However it could still be a sensible option to consider particularly if there is little or no equity in your property.
Included in this article:
- How is your home affected by bankruptcy?
- Is it at risk if there is little or no equity?
- What happens if you are a joint homeowner?
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How is your Home affected if you go bankrupt
If you go bankrupt you will not automatically have to sell your home. You can stay living in it as long as you maintain the mortgage payments. However your beneficial interest in the property is transferred to the Official Receiver (OR).
Beneficial interest is basically your share of any equity. If this amount is £10,000 or more, an equivalent cash sum will have to be raised and paid to the OR.
You will normally have 12 months to raise the required funds. Once the money is handed over, your beneficial interest in the property is returned to you. Any future increases in the property equity are then yours to keep.
Your property is only at risk if being sold if you are unable to or make no attempt to buy back your beneficial interest from the Official Receiver.
Is your Property at risk if there is little or no equity?
Where there is little or no equity in your home, your beneficial interest is still transferred to the OR. But at this point they will take no action as there is no financial value in it for them.
However it is very important to understand that they retain the beneficial interest for 3 years. Normally after 2 years and 3 months you will receive a letter from the OR. You will have to provide an up to date valuation and mortgage statement allowing that to make a revised assessment of the equity.
Where there the value of your share of the equity has increased above £10,000 you will have to raise an equivalent sum and pay this to the OR. If you are unable to do so they could then force the sale of the property. Where the value of your equity is less they are likely to put a charge on the property equivalent to its value.
You can buy back your beneficial interest in your property from the OR at any time after you go bankrupt. You will have to pay a cash sum equivalent to the value of your share of the equity or £1000 which ever is the greater.
What happens if you are a joint homeowner and you go bankrupt?
If you own your home in joint names with someone else, the other joint owner’s share of any equity is not at risk. Whatever happens to the property they will always eligible to receive their fair share of any equity.
However the same rules apply to your share of the equity as if you had been the sole owner. In other words the OR will still need to release your share if there is any.
If the joint owner or another third party can raise the funds to buy back your beneficial interest from the OR this is the ideal solution. If it is valued at more than £10,000 and the money can’t be raised, the OR may then have to resort to selling the property.
Where the OR has to resort to forcing the sale of a property, other joint homeowner can’t stop this. Even if children are involved any legal challenge will normally be refused by the court. After any sale they will be given their share of the equity raised.
i was bancrupt in 2008 and am now selling my house, how can i remove the bankruptcy notice from the land registry so enabling me to sell my house, also, is the OR entitled to any of the proceeds ?
Hi Steve
I assume that in 2008 there was little or no equity in your property? Did you take any action to buy back your financial interest in it at the time?
Are you aware whether the official receiver contacted you about the property at any time since you went bankrupt? If not and the property is your main place of residence, then after 3 years from the bankruptcy date, any financial interest the OR might have had in it should have been automatically returned to you. You would then be able to keep 100% of the proceeds of any subsequent sale.
You should have received documentation regarding this and any restrictions placed against the property and detailed on the land registry should have been removed. If this has not happened, you will have to contact the OR (probably the LTADT – Long term assets distribution team) and get the situation resolved with them. Given the financial interest was returned to you after 3 years, there should be no problem.
If I go bankrupt the house is in my wife’s name will that affect her and the house thanks
Hi Nigel,
If you are married then your property may be at risk even if it is in your wife’s name. It will depend on how and when the house was purchased. If your wife bought the property before you got together, has always paid the mortgage from her own funds and you have not been married a long time she may be able to successfully argue that you have no interest in it. However if any of these things is not true then there could be a risk to the property.
That said, you also have to consider the size of the risk. So for example if there is little or no equity in the property, even if the official receiver was to argue you have an interest, this would be small and it would be relatively easy to deal with it.
The bottom line is that you should definitely NOT go bankrupt without taking further expert advice. By all means give us a call and we would be happy to discuss the option with you (0800 044 3194).
I need to file for bankruptcy as I’m in around £30000 debt after having to leave my job when pregnant and now covid. I bought a share of a discounted sale home in May 18. I think I have around 5k equity…. would I have a year to get this cash or would I need it when I file. I can’t afford rents where I live and need to keep my home. I just don’t know what to do. I don’t want an iva because I plan to have more children and don’t want to void it if I need to stop working again in the future and can’t make payments.
Hi Katrina
If there is less than £10k of equity in your property, bankruptcy is certainly an option for you.
You do not have to have any cash available on the day you apply. For equity below £10k, the official receiver will give up to 3 years for you to come up with the funds to buy back your interest.
You can offer to buy back your interest at any time within those 3 years. But remember, the amount you eventually have to pay is based on a valuation of your property at the time you pay the money. As such if house prices rise in the meantime, you might face having to pay more than the £5k you are currently budgeting for.
As a home owner I do suggest you give me a call to have a chat before you make the final decision to apply. I would be very happy to give you further advice. Call 0800 044 3194