Bankruptcy: handing back the keys to your home

A house is usually listed as an asset. However, for many CCCS clients, the opposite is true. For some, their property is listed as a liability - often it’s the biggest liability.

As a debt advisor one of the hardest things I have to do is tell people that their home is major cause of their debt problems and the best thing to do would be to hand the keys back and go bankrupt.

People have emotional attachments to houses and property. It’s where they live. Whether it’s a castle or an ex-council flat people put a lot of themselves into their home. Explaining to someone that their situation would only improve if their relinquished the house they have invested so much of themselves in can be tough.

You may own it, but it can own you

The amount of home owners stuck in the negative equity trap has been widely reported in the media. If you combine this with an income shock such as redundancy, separation or illness, and throw in some unsecured debt which cannot be serviced, you’ll soon see that radical financial action is needed.

It’s also a fact that in some cases it’s cheaper to rent a similar property in the same area than it is to try and service a mortgage on a high (often variable) interest rate. With a damaged credit rating the rate cannot be changed. Some people are held hostage to a mortgage.

All of these factors can mean that bankruptcy and handing the keys back are good advice. We often deal with clients with negative equity of £25,000 plus, who are on interest-only mortgages with no other repayment vehicle set up or likely money available to ever repay the principle sum borrowed.

Handing back the keys

Clients are often shocked when they hear that the best way to solve their debt problem is to go bankrupt. Bankruptcy itself sometimes has a stigma attached to it that it really doesn’t deserve.

Reeling from being told that bankruptcy is the best solution, they often wonder if they’ll be able to keep their property. When it’s explained to them that the best situation would be to hand back the keys to the lender and include the often significant mortgage shortfall in with the other debts, clients are sometimes left speechless.

Bankruptcy may seem bad, but losing your home is incredibly tough for some people to handle.

Home can be a castle or a prison

In bankruptcy the Official Receiver may allow a client to continue to live in, and sometimes keep, a property with significant negative equity. After all the Official Receiver knows that a client leaving a property with negative equity would make the overall debt in the bankruptcy bigger (the last thing the Official Receiver wants).

However, keeping and maintaining mortgage payments on a property with negative equity may not be best advice, especially if you’ve already gone bankrupt. Many people may have gone bankrupt for unsecured debt, but try to continue to keep up to date on the bigger secured debts on their property.

The home can become a prison that will likely never be a real asset. This is especially true in a stagnant housing market.

The best advice

We offer free debt advice and solutions to anyone who wants to take that first step. We’re a charity and we’re impartial. We’ve also got a dedicated bankruptcy team that helps people from all walks of life.

If bankruptcy is the best option and your property is also a problem it’s always worth taking advice. Even if an Englishman’s home is his castle it’s not worth defending if you owe the more on the ramparts than the castle’s ever likely to be worth.

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