When you are in the unfortunate position of knowing you’re going to lose your home, deciding between repossession or bankruptcy can seem like a horrible choice. But is one of these things better than the other?
Here we’ll take a close look at which is the better option, whether they can be avoided, and look at some important tips. By the end, your next steps should hopefully be much clearer. All you need to do is read on to find out more.
What Causes a House Repossession?
When you purchase a home, you enter into an agreement whereby your property can be repossessed if you can no longer make your mortgage payment. A lender will often give you a few chances to come up with a payment plan to catch up with your payments.
If no agreement can be reached, or you ignore the lender, then they can apply to the courts for a repossession. A judge will then see your case, which you can contest, and then will make a decision on whether or not to grant a repossession order.
How Common is Bankruptcy for UK Homeowners?
In 2022, one in 399 adults in the UK entered into some form of insolvency, which is a rate of 25 per 10,000 people. In total, this meant that 118,850 people entered personal insolvency in the UK, slightly higher than the 2019 figure of 110,045.
Of those 118,850 insolvencies, only 6,662 were bankruptcies, with the rest being made up of debt relief orders (24,219) and individual voluntary arrangements (87,969). There aren’t statistics to indicate how many of these insolvencies involved those with properties, but the rate of bankruptcies is steadily declining.
A part of the reason for this is the rise in individual voluntary arrangements (IVAs), as this is a form of insolvency that often allows you to keep your property, even when struggling with debts. Debt relief orders (DROs) were introduced in 2009 and are mainly for those with minimal assets and income.
The important takeaway here is that it’s possible that repossession and bankruptcy aren’t the only options available to you. As we’ll discuss in the next section, it’s vital not to accept the fate of losing your home.
What’s Worse: Repossession or Bankruptcy
Before we look at other options, let’s answer this key question. There are pros and cons to each option if you’re in this unfortunate scenario, but the answer generally depends on if you have other debts.
For example, you have £30,000 in unsecured credit card and loan debt that you’re struggling with, on top of missing your mortgage payments. In this situation, it’s probably best to go bankrupt as it will also clear your other debts too.
Conversely, you have no debts aside from struggling with your mortgage. Here it may be better to let the repossession happen as you wouldn’t get the long-term negative effects of bankruptcy and can start rebuilding your financial life once again. While repossession can be better than bankruptcy, it’s never advisable if you have the choice.
While those are good examples, they are quite basic. That’s because other factors can play a role. For example, if you have negative equity in your home, then letting it be repossessed can lead to you having a huge debt. This is because you’ll be liable for the remaining mortgage that the property sale couldn’t cover.
Alternative options to bankruptcy or repossession:
Sell your home
If you are struggling to pay your mortgage, then it may be best to sell your property as soon as you can. Repossessed homes are sold at auction and can end up selling far below their market value. Selling your home can get you ahead of the problem.
IVA
IVAs are ideal for homeowners that want to protect their property. You enter into an agreement to pay as much as you can afford monthly, usually for a period of 5 years. Once completed, the rest of your debt is written off.
Come to an agreement
Speak to your lender as soon as you know you’re in financial trouble. You can often come to an agreement with them. This will often involve a temporary period where you can reduce or stop your payments.
Debt management
If you’re struggling with mortgage payments due to other debts, then speak to your creditors. They will often agree to a reduced payment plan with you, especially if insolvency is the alternative. You can then use the money saved to pay your mortgage.
The Importance of Getting Legal Advice When Facing Repossession or Bankruptcy
We’ve tried to keep this as simple as possible, but the truth is that insolvency is complex. There are several factors that can all affect each other. Aspects such as your income, profession, future plans, and reputation can also impact what the best route for you to take is.
If you’re reading this, then it already means you’re trying to take control of the situation. That’s a great place to start, but it’s best to get legal advice to know exactly what your next steps should be.
Everyone’s situation is different. Therefore, the best advice for you will depend on your individual circumstances. It’s best to get in touch with a professional to start your journey to a debt-free future. It may seem difficult now, but there is plenty of help available.
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Click on this link if you want to find out more about whether you will lose your home if you go bankrupt.
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