What do you need to do if you want your house to be repossessed after you go bankrupt in England, Wales or Northern Ireland? Perhaps the house is unaffordable, has negative equity, or it’s the wrong size for you. For whatever reason, you want to move out, are happy for the mortgage lender to repossess and may want to “hand back the keys” as fast as possible to get it all over with.
The mortgage debt forms part of your bankruptcy
Some of the information you may read on the Internet about mortgages and bankruptcy can be confusing. To understand what happens, think of the mortgage as a being a combination of two different things:
- the mortgage debt, the money you borrowed from the lender; and
- the mortgage security, your house.
The debt is wiped out by bankruptcy. You will have listed the mortgage and any other secured loans on your bankruptcy application. You don’t have to do anything special for these debts – they will be wiped out by your bankruptcy when you are discharged in the same way that unsecured debts such as credit cards are.
But the lender still has your house as security. Even though the “debt” part of the mortgage no longer exists, if you don’t carry on making the agreed debt and interest repayments the lender will at some point repossess your house and sell it. Because of this, if you want to stay in the house you need to carry on with the repayments, but I’m not considering this case in this article, which only looks at the situation where you do NOT want to stay in the house.
How to get the house repossessed
You need to do two things:
- stop paying the mortgage. You may already have stopped paying the mortgage before you went bankrupt as it’s a good way to get the deposit for somewhere to rent and your bankruptcy fees.
- move out
- inform your mortgage lender by letter that you have moved out, give them your new address, and say they should repossess the house. Hand back the keys if this is easy.
You do not have to attend any meetings the mortgage lender invites you to or any court hearings. Handing over the keys is just a symbolic gesture – if your lender doesn’t make it easy for you to do this, don’t worry about it.
You do not have to sign any documents the lender sends you, see below.
The lender will organise the repossession. This may take longer than you think is reasonable but it really doesn’t make a difference for you. Just reply to any contact from the lender that you have gone bankrupt, you have left the property and you do not intend to start repaying the mortgage.
If you later hear the house is on sale for what you think is too low an amount, just shrug, it’s not your problem. If the sale price isn’t enough to repay the mortgage, it doesn’t matter how large the shortfall is, it will all be wiped out by your bankruptcy.
Do not sign a Deed of Acknowledgement
The one thing you have to be careful about is that you must not sign a Deed of Acknowledgement. The Insolvency Service has said this:
“Sometimes, after the date of the bankruptcy order a lender might ask you sign a document in which you agree to be responsible for the debt and any shortfall arising on the sale of the property. This is known as a deed of acknowledgement of a debt. If you sign it, the lender will be able to ask you to pay the debt after you have been discharged from your bankruptcy [my bold]. If you are asked to sign a deed of acknowledgement you may wish to take legal advice before doing so.”
So bankruptcy wipes out your mortgage debt but if you sign this afterwards, you are back owing the money.
If you want the house to be repossessed you should refuse to sign this. If the lender suggests that you can’t hand back the keys unless you do, just refuse. Your local Citizens Advice will confirm that you do not have to sign this.
You might wonder why anyone would ever want to sign this. If you want to keep the house then there may be some circumstances in which it is a good idea, in this case you DO need a lawyer. But I can’t think of any reason why someone who is moving out should ever sign it.
“Help, I’ve already signed one”
If you signed the deed of acknowledgement before you went bankrupt, it doesn’t matter. The mortgage shortfall when the house is sold will be wiped out by your bankruptcy. If you are unsure about this, ask your Official Receiver’s office.
If it was after your bankruptcy, then you need to take advice, especially if you feel you were misled into signing it. Go to your local Citizens Advice Bureau.