If you are a homeowner and thinking about bankruptcy you need to understand whether or not your house is at risk. We investigate how you can keep you house if you declare bankruptcy.
As a home owner, declaring yourself bankrupt does not necessarily mean that you will lose your house. However, you need to understand what will happen to your property after you are bankrupt. Some new rules were introduced at the beginning of 2011 which make the situation much clearer.
Negative equity
If your property is in negative equity at the time you go bankrupt the risk that you will lose your property is generally very low. The argument is that no value can be raised from your property to help repay your creditors.
Unless the official receiver has reason to believe that the value of your property is likely to rise significantly in the near future, then you will be allowed to simply buy back your interest in the property from the receiver for a nominal sum.
The nominal sum required will normally be one pound plus costs so could come to around £150. You should make the offer to buy back your interest immediately after you have been declared bankrupt so that you do not forget to do so.
Minimal positive equity
If there is positive equity in your property, but this is minimal. Again the risk that you will lose your home is low.
If the equity is minimal such that it would not be worth trying to sell the property to release the equity, you can buy back your your property. However, the amount you pay must be the same amount as the value of the equity. If the value of the equity is £1500, you will need to raise £1500 possibly from a friend or family member to buy your property back.
If you cannot afford to do this the official receiver is allowed to keep ownership of your property for up to 2 years and 3 months.
During this time you can make an offer to buy back your title. However, if you have not done so, after two years and three months the property must be revalued.
What if house prices change?
If after two years and three months, the equity in your property has remained the same or fallen and is less than £1000, the property is simply returned to you.
If the equity is more than £1000, then you have the option of buying it back by paying a sum equal to the value of the equity. If you cannot afford to do this and the amount of equity in the property is not significant, the official receiver will give it back to you but put a charge against it for the value of the equity.
In today's housing market the possibility of the value of your home rising significantly is generally low. However, it is important to understand that if the value of your house does rise and the equity increases considerably, the official receiver has the option to force the sale of the house to release the equity rather than putting a charge on it and returning it to you.
Significant positive equity
The highest risk that you will lose your property if you are declared bankrupt is if there is significant equity in it.
To understand "significant equity" you need to consider whether after the cost of selling your home, there would still be a sensible amount of equity left over which the official receiver could use to repay your creditors.
If the answer to this is yes, then unless a friend or family member can buy out your equity on your behalf, the risk is high that the official receiver will try to force the sale of your house.
You may well be given some time to find alternative reasonable accommodation. However, even if you are supporting a family who live with you, the OR can still force the sale of the property.
Joint ownership
When calculating the equity in your home, you need to take account of anyone who has joint ownership of the property.
If there is a joint owner, then generally speaking any equity in the property is split fifty fifty.
If you are declared bankrupt, 50 percent of the equity in the property is the joint owner's. Only your half of the equity is considered by the official receiver when deciding how the property should be dealt with.
Know where you stand
If you are considering bankruptcy but you are a home owner, it is very important to know where you stand concerning your property.
Unless you are sure that your home is in negative equity, it is normally sensible to get your property valued before going down the bankruptcy route. You can then plan how you will deal with any equity and there will be no nasty surprises. The valuation will also come in extremely useful when speaking to the official receiver and making an offer to buy back any equity that you have.
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