Mortgages after a bankruptcy: What you need to know

Getting a mortgage with a bad credit rating is one thing, bankruptcy is an entirely different beast. This legal process is very much a last resort where a person is unable to repay their debts and may have to sell their assets to settle the outstanding balances. Here we take a closer look at mortgages after bankruptcy, and how it’ll impact property ownership in the present and the future.

I’ve filed for bankruptcy, will I have to sell my home?

Your home may be at risk if there’s equity along with any other non-essential assets, such as a second car or investments. This is really down to the trustee that will take control of your assets as part of the bankruptcy process.

The trustee will decide if it is suitable to sell these assets to repay your creditors. This could take up to three years to take effect, with a grace period of 12 months generally given to those affected to make alternative living arrangements.

Your partner (if you have a joint mortgage) or a helpful family member could buy out your share in order for you to keep your home.

What happens if I don’t have equity in my property?

If there is no or very little equity (under £1,000), the trustee may not sell your home after filing for bankruptcy. Again, a timescale of three years is given for the trustee to act, after which point property ownership automatically reverts to you once more. The same is true if your property is in negative equity.

You should continue to pay your mortgage during this period. Failure to do so will lead to repossession, this time by your mortgage lender.

Are second homes also at risk following bankruptcy?

If you are a second homeowner, there’s more bad news following bankruptcy. Like a second car or the interests in your investment portfolio, second properties are classed as non-essential assets. This means that the trustee will almost always sell them to repay your creditors, regardless of what kind of equity is held within the asset. As a result, you will lose ownership, and any tenants may be affected.

What are the alternatives to bankruptcy?

Before you file for bankruptcy, it is important to note that this isn’t your only option. Depending on the level of debt and your circumstances, you may be able to negotiate an Individual Voluntary Arrangement (IVA).

An IVA is a popular alternative to bankruptcy, especially if you own a home. It’s usually arranged by an insolvency practitioner, with a formal payment plan agreed between you and your creditors. IVAs usually span a period of 5 to 6 years, with any remaining debt typically written off. In the event of an IVA, you don’t have to sell your home but may be advised to release equity via remortgaging.

How will bankruptcy or an IVA affect future applications?

Both bankruptcy and an IVA will appear on your credit file for a certain period, and will impact your creditworthiness. We’ll let Equifax explain how your bankruptcy status could change things:

“When you are made bankrupt a note is added to your credit file, which will stay on there for six years after you were made bankrupt. A bankruptcy can show that you are at a higher risk of defaulting on your repayments and can make it very difficult to obtain credit or to even open a new bank account. The extent to which your bankruptcy will affect your creditworthiness and how long it will take to improve it, will depend on your particular circumstances.”

Are you reviewing your mortgage options after bankruptcy? Do you have an IVA in place and need to release equity? Or perhaps you’ve been made bankrupt in the past and are now looking to get back onto the property ladder? We can help with mortgage advice and support for your circumstances. Get in touch with our team for a no-obligation chat.