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Your house and bankruptcy

Published: 09 February 2024

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Are you concerned about your house and bankruptcy? Will you lose your home? In fact this is not always the case. Bankruptcy Guide provides specialist advice about how your property will be affected.

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Will your house have to be sold if you go bankrupt?

Despite what you might think, The Official Receiver does not automatically sell your house if you go bankrupt. They do not want to sell it simply for selling’s sake.

However, they do have to release your financial interest in the home. In other words, they have to get their hands on your share of any equity.

The ownership of your financial interest (or equity) passes automatically to the OR. They will register this at the land registry and inform any other interested party such as a joint owner.

Bankruptcy does not write off your mortgage. If you want to keep your home, you must keep your mortgage payments up to date.

Navigating the complexities of your house and bankruptcy can be daunting, but you don’t have to do it alone. Our dedicated team of professionals is here to guide you through the process.

How is the equity in your property calculated?

The equity in your house is basically the money that would be left over if you sell it and the mortgage and other charges are paid.

For example, if your property is worth £300,000 and the outstanding mortgage is £260,000, then your equity is £40,000

Under normal circumstances, this money would then be yours to keep. Very often to use as a deposit to buy a new property. If you are bankrupt, you have to hand over your share of this to the Official Receiver.

In most cases you have to use an independent local estate agent or professional valuer to establish the value of your property.

Calculating the equity in your home is crucial as it helps determine what happens to your house during the bankruptcy process.

How does the OR release the equity in your house?

When it comes to your house and bankruptcy, you will be given different options to release equity after you go bankrupt.

House on English street with for sale sign depicting selling house in bankruptcy

Firstly, a third party can offer to pay the Official Receiver the equivalent amount. This is known as buying back the financial interest. If you have significant equity and you want to keep your property, this is likely the option you will need to choose.

Secondly, the OR could put a charge against the property for a sum equivalent to your share of the equity. When you eventually sell the property, you will have to pay back the Charge out of your equity at the time. It is in your interest to pay off the Charge earlier if you can because interest will be added at 8% per year.

The OR will normally only use the option of a charge where the value of the equity is minimal (up to £10,000 is a rule of thumb).

The third option is the sale of the property. Ideally this would be voluntary. However, if you do not co-operate, the OR can take action to force a sale after 12 months. This is even if you have children or you own the property with someone else in joint names.

Do you have to sell your house if there is no equity?

If you have less than £1000 of equity in your house or it is in negative equity, it is known as a low value home.

In these circumstances, the Official Receiver has the option to simply defer any action surrounding your house and bankruptcy for up to 3 years. This is the case even though by this time it is likely that you will no longer be bankrupt.

Normally they review the value of your equity again no later than 2.5 years from the date you went bankrupt. If the equity is still negative, the OR will return the financial interest to you and that is the end of the matter.

However, if your equity has increased, it will have to be released.

Where your property is low value, you can offer to buy back your financial interest from the OR. You will normally need to offer at least £1000 plus pay for the OR’s solicitors fees).

You can do this at any time after the date of your bankruptcy. However, the OR does not have to accept the offer. 

Rather than keeping your file open for 2.5 years, the OR might simply decide that maintaining an interest in the property is of no benefit to your creditors. If so they can simply return it to you immediately. This might happen if there is no real prospect of equity in the property becoming available even after 3 years.

What if you go bankrupt and your property is in joint names?

When it comes to your house and equity, if you own a property jointly you might be worried about the other person. The good news is the Official Receiver is only interested in your share of the equity.

Image of house owned by two people in joint names

Your share of the equity is based on the percentage of the property you own. So if you own 50%, and there is £40,000 of equity, the OR can only claim £20,000 (50% of the total).

The other owner’s share is protected. However, yours has to be released.

Ideally the other joint owner or another 3rd party will be able to come up with a lump sum to buy back your financial interest. But if not, the OR can still force the sale of the house.  

To protect the interest of the other joint owner, the OR can’t force a sale for 12 months. However, if it were to happen, the other joint owner would always receive their share of the equity released.

Shared ownership homes and bankruptcy

If you have a shared ownership home, you may still have to release equity from your house if you go bankrupt.

You calculate your equity using the market value of the property overall but based on the share of the property you own.

For example, let’s assume the market value is £300,000. If you own 40%, your 40% is worth £120,000. You deduct your outstanding mortgage amount from this figure to calculate your equity.

   Written by James Falla

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