Brendan Burgess
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The Insolvency Service published three case studies recently, where all three bankrupts kept their family home. I have summarised and commented on these case studies here
ISI Case study - bankrupt's wife takes over the home in negative equity
ISI case study - Martin and his buy to let
ISI case study - bankrupt keeps the family home in positive equity
In all three cases, bankruptcy is used to free the borrowers from their unsecured debts. In none of the cases, is the actual mortgage debt written down in any way.
In this thread, I have expressed doubt that mortgage lenders will actually write down mortgage debt very often.
Will the threat of bankruptcy force mortgage lenders to do deals?
In most of the cases, the threat of bankruptcy might make the unsecured creditors more willing to agree to an informal arrangement or a Debt Settlement Arrangement.
I set out a few case studies here where I examine the impact of bankruptcy in different scenarios.
Married couple – positive equity
Michael and Mary jointly own a home worth €300k with a mortgage of €200k. Michael has €150k of unsecured debt in his sole name.
Michael is insolvent, Mary is not.
He applies for bankruptcy and the Official Assignee will offer to sell his share in the equity for €50k to Mary. Assuming the mortgage lender agrees to lend Mary the €50k, Mary will end up with the house in her sole name and a mortgage of €250k.
Michael’s unsecured creditors will receive €50k between them. Michael will be allowed reasonable accommodation expenses over the three years of bankruptcy so he can pay the mortgage. So after three years, Michael will be solvent and his wife will own a house with €50k or so equity in it.
By going bankrupt, the mortgage becomes more sustainable because Michael will not be under pressure from the unsecured creditors. So bankruptcy is useful in these circumstances.
Would an informal arrangement be better? Ask the unsecured creditors to write their debt down to €50k. If Mary can raise €50k to buy out Michael’s equity, could she raise €50k to pay off the creditors in full and final settlement of the €150k owed.
If the creditors don’t unanimously agree, then Michael could go for a Debt Settlement Arrangement with the unsecured creditors.
Bankruptcy may not needed in this case, but the threat of bankruptcy may be enough to motivate the unsecured creditors to do a deal.
Married couple where the house value is the same as the mortgage
Ann and Andrew have a house worth €300k and a mortgage of €300k. Andrew has unsecured creditors of €200k.
Andrew goes bankrupt to get rid of the unsecured creditors. Ann takes over 100% ownership of the house and the mortgage.
Again, Andrew should try to do a deal with the unsecured creditors or go for a Debt Settlement Arrangement if he can’t get agreement.
If he is forced into bankruptcy, so be it.
Married couple – big negative equity and big unsecured debts
Paul and Patricia have a home worth €200k and a mortgage of €500k. Paul also has unsecured debt of €250k.
If Paul goes bankrupt, his unsecured debt will be wiped out and so will his negative equity.
But Patricia is jointly and severally liable for the full mortgage. So after Paul’s bankruptcy, Patricia will have a house worth €200k and a mortgage of €500k.
The Official Assignee will allow Paul to pay reasonable accommodation expenses in bankruptcy so he will be able to help Patricia meet the mortgage repayments.
So bankruptcy in this case gets rid of the unsecured creditors but doesn’t get rid of the negative equity.
If their joint income is enough to sustain a split mortgage of say €300k, the mortgage lender may warehouse €200k.
However Patricia will be in negative equity for a long time to come.
It seems to me that they would be better off agreeing to a voluntary sale of their home and then applying for a Debt Settlement Arrangement on the unsecured debt. If they can’t get the required majority of creditors to approve the DSA, then they can both apply for bankruptcy.
Married couple big negative equity and other big property loans with one lender
Helen and Harry have a home worth €500k and a mortgage of €1m. They also have investment properties worth €5m and mortgages of €10m.
The lender will do a deal with Helen and Harry for their cooperation in the orderly disposal of their properties over time. Depending on the circumstances they could be left with their family home and a mortgage of €500k to match. Or they could be asked to sell their family home and trade down to a mortgage-free property worth €200k.
These deals have always been done. The new bankruptcy legislation doesn’t make much difference.
Single guy with positive equity
Of course, the bank won’t need to do a deal. They will just insist on the voluntary sale or repossession.
If bankruptcy gets rid of his unsecured debts, he might get to keep his home. But surely the Official Assignee will sell the home to realise equity to pay the unsecured creditors?
Single person with big negative equity
Again, the lender is unlikely to write down debt.
In my view, the best option for the borrower is to sell the house and do a deal on the mortgage shortfall.
If the borrower wants to keep the house, they could try for a split mortgage, but a voluntary sale and a fresh start after bankruptcy or a Debt Settlement Arrangement would be a much better option.
ISI Case study - bankrupt's wife takes over the home in negative equity
ISI case study - Martin and his buy to let
ISI case study - bankrupt keeps the family home in positive equity
In all three cases, bankruptcy is used to free the borrowers from their unsecured debts. In none of the cases, is the actual mortgage debt written down in any way.
In this thread, I have expressed doubt that mortgage lenders will actually write down mortgage debt very often.
Will the threat of bankruptcy force mortgage lenders to do deals?
In most of the cases, the threat of bankruptcy might make the unsecured creditors more willing to agree to an informal arrangement or a Debt Settlement Arrangement.
I set out a few case studies here where I examine the impact of bankruptcy in different scenarios.
Married couple – positive equity
Michael and Mary jointly own a home worth €300k with a mortgage of €200k. Michael has €150k of unsecured debt in his sole name.
Michael is insolvent, Mary is not.
He applies for bankruptcy and the Official Assignee will offer to sell his share in the equity for €50k to Mary. Assuming the mortgage lender agrees to lend Mary the €50k, Mary will end up with the house in her sole name and a mortgage of €250k.
Michael’s unsecured creditors will receive €50k between them. Michael will be allowed reasonable accommodation expenses over the three years of bankruptcy so he can pay the mortgage. So after three years, Michael will be solvent and his wife will own a house with €50k or so equity in it.
By going bankrupt, the mortgage becomes more sustainable because Michael will not be under pressure from the unsecured creditors. So bankruptcy is useful in these circumstances.
Would an informal arrangement be better? Ask the unsecured creditors to write their debt down to €50k. If Mary can raise €50k to buy out Michael’s equity, could she raise €50k to pay off the creditors in full and final settlement of the €150k owed.
If the creditors don’t unanimously agree, then Michael could go for a Debt Settlement Arrangement with the unsecured creditors.
Bankruptcy may not needed in this case, but the threat of bankruptcy may be enough to motivate the unsecured creditors to do a deal.
Married couple where the house value is the same as the mortgage
Ann and Andrew have a house worth €300k and a mortgage of €300k. Andrew has unsecured creditors of €200k.
Andrew goes bankrupt to get rid of the unsecured creditors. Ann takes over 100% ownership of the house and the mortgage.
Again, Andrew should try to do a deal with the unsecured creditors or go for a Debt Settlement Arrangement if he can’t get agreement.
If he is forced into bankruptcy, so be it.
Married couple – big negative equity and big unsecured debts
Paul and Patricia have a home worth €200k and a mortgage of €500k. Paul also has unsecured debt of €250k.
If Paul goes bankrupt, his unsecured debt will be wiped out and so will his negative equity.
But Patricia is jointly and severally liable for the full mortgage. So after Paul’s bankruptcy, Patricia will have a house worth €200k and a mortgage of €500k.
The Official Assignee will allow Paul to pay reasonable accommodation expenses in bankruptcy so he will be able to help Patricia meet the mortgage repayments.
So bankruptcy in this case gets rid of the unsecured creditors but doesn’t get rid of the negative equity.
If their joint income is enough to sustain a split mortgage of say €300k, the mortgage lender may warehouse €200k.
However Patricia will be in negative equity for a long time to come.
It seems to me that they would be better off agreeing to a voluntary sale of their home and then applying for a Debt Settlement Arrangement on the unsecured debt. If they can’t get the required majority of creditors to approve the DSA, then they can both apply for bankruptcy.
Married couple big negative equity and other big property loans with one lender
Helen and Harry have a home worth €500k and a mortgage of €1m. They also have investment properties worth €5m and mortgages of €10m.
The lender will do a deal with Helen and Harry for their cooperation in the orderly disposal of their properties over time. Depending on the circumstances they could be left with their family home and a mortgage of €500k to match. Or they could be asked to sell their family home and trade down to a mortgage-free property worth €200k.
These deals have always been done. The new bankruptcy legislation doesn’t make much difference.
Single guy with positive equity
Of course, the bank won’t need to do a deal. They will just insist on the voluntary sale or repossession.
If bankruptcy gets rid of his unsecured debts, he might get to keep his home. But surely the Official Assignee will sell the home to realise equity to pay the unsecured creditors?
Single person with big negative equity
Again, the lender is unlikely to write down debt.
In my view, the best option for the borrower is to sell the house and do a deal on the mortgage shortfall.
If the borrower wants to keep the house, they could try for a split mortgage, but a voluntary sale and a fresh start after bankruptcy or a Debt Settlement Arrangement would be a much better option.