Does Bankruptcy Mean Selling Your Home?

Bankruptcy does not automatically mean losing your home, but it can. If you rent and your rent is up to date, you can usually stay where you are. If you own your home, the outcome depends on whether there is equity in it: the Official Receiver or a trustee can ask you to sell if there is, may let you keep it if there is not, and could ask you to sell later if the property goes up in value¹.

The things you own may be sold to pay for your bankruptcy and make payments towards your debts, and that can include your home and non-essential possessions worth a lot of money³. A house, a car and other items of value may all be sold, with the money going towards the bankruptcy¹.

If you have a mortgage, the debt is treated differently from unsecured debts. You keep paying it as normal if you stay in your home, and it is only included in the bankruptcy if you surrender the property or it is repossessed⁵. The trustee will tell your mortgage lender you are bankrupt, and the lender may consider repossession even if you are up to date with your payments, with that more likely if you are behind².

Bankruptcy can mean releasing equity or selling your home

When you go bankrupt, ownership of your home passes to the Official Receiver or a trustee in bankruptcy, whose job is to release any beneficial interest, meaning the surplus funds tied up in the property, by whatever means necessary, including selling your home⁷. If there is any equity available in your home, whether by legal ownership or beneficial interest, it is transferred automatically to the Official Receiver, who will look to release it by selling the property⁸.

Your share of equity can be claimed in one of three ways: the trustee selling your property; the trustee securing a charging order against your property, which is paid plus interest when you sell in future; or you or someone else buying your share of the equity after your bankruptcy ends at an agreed price². If you have little or no equity, it is returned to you².

The practical effect is that the answer to whether you keep your home turns on a valuation exercise, not on the fact of bankruptcy alone. A property in negative equity, where the mortgage and any secured loans exceed what the home is worth, leaves nothing for a trustee to release. A property with substantial equity gives the trustee something to pursue. The trustee can also revisit the position if the housing market moves: they could ask you to sell if the house goes up in value¹.

Mortgage or rent arrears: the debts to deal with first

Mortgages are priority debts, and they come first because the lender could repossess the home and sell it to get their money⁹. Rent arrears are also a priority debt and are repaid before credit debts such as loans and credit card repayments¹⁰. If rent or mortgage payments are not made, the home can be lost¹¹.

Priority debts are those that carry serious consequences if unpaid. They can make you homeless if you have mortgage or rent arrears, leave you without services you need to live such as energy, or result in court action for certain debts such as council tax arrears¹². Examples include mortgage or rent, service charge or ground rent, council tax, electric, gas, water, hire purchase goods, county court judgments, magistrate or court fines, and child maintenance¹¹.

Not paying priority debts can mean losing your home through mortgage or rent arrears, facing action by enforcement agents, having your gas or electricity supply cut off or accepting an expensive pre-payment meter, or losing belongings on hire purchase such as a car, furniture or other goods¹³.

If you are a homeowner and do not pay a county court judgment, creditors could ask the court to send enforcement agents to seize your non-essential goods or make you bankrupt, and this could result in losing your home¹³. That is why arrears on the roof over your head come before credit cards and personal loans in any repayment plan. See which debts to pay first for the full order of priority.

Alternatives to bankruptcy: DMP, DRO and IVA

Bankruptcy is one of several debt solutions, not the only one. The main alternatives are a debt management plan (DMP), a debt relief order (DRO), an individual voluntary arrangement (IVA), and in Scotland the Debt Arrangement Scheme¹⁴. A DMP is similar to consolidation but has different processes and benefits¹⁴.

A DRO may be a cheaper alternative to full bankruptcy for some people¹⁵. However, a DRO is not suitable for homeowners because of the restriction on the value of assets¹⁷. You also cannot get a DRO if you are already bankrupt, are in an IVA or an interim order has been made, are subject to a bankruptcy restrictions order or undertaking or a debt relief restrictions order or undertaking, or have a bankruptcy petition pending unless referred by a court¹⁸.

An IVA is a formal arrangement with your creditors, and the treatment of your home within it differs from bankruptcy. Where ownership of your home is passed to the Official Receiver or trustee in bankruptcy to release any beneficial interest by whatever means necessary, including by selling your home, an IVA works to different terms⁷.

Free and independent advice on debt management plans, or any kind of debt problem, is available from organisations such as Advice NI¹⁹. Advice NI's Debt Action service provides advice on debt management plans, bankruptcy, individual voluntary arrangements and debt relief orders²⁰. For a fuller comparison of the formal options, see debt solutions across the UK.

Free debt advice from National Debtline: 0808 808 4000

National Debtline is a free and confidential debt advice service for people in England, Wales and Scotland, run by the Money Advice Trust²¹. You can call for free debt advice on 0808 808 4000²². The same number is published for free advice on free DMPs or negotiating reduced payments yourself²³, and as a freephone number for previous callers advised a DMP is a good option²⁴.

You can also reach National Debtline by phone, webchat or My Money Steps²⁵. Debt advice services are free²⁶, and you do not need to pay for debt advice²⁷. If you owe money to HMRC, you can get free, confidential and independent advice from a debt adviser²⁸.

In Scotland, you must speak to a money adviser before you can go bankrupt, and they must sign your bankruptcy application forms²⁹. Anyone going bankrupt in Scotland has to speak to an approved money adviser first³⁰. In Wales, professional advice should always be sought before starting the bankruptcy process³¹.

What National Debtline cannot do for you

National Debtline is clear about the limits of its service. It cannot help if you do not have debt, cannot speak to the people you owe money to for you, does not give face-to-face advice, does not give money to pay your debts, and cannot give written information in your language³².

There is also a practical warning about budgeting paperwork. Do not send a copy of the blank budget to creditors; National Debtline will help you create a summary budget for creditors³³.

Bankruptcy itself brings restrictions. You cannot buy a house under the right to buy scheme³⁴. On the other side of the ledger, the people you owe cannot take action to collect your debts during bankruptcy³⁵. Debt collectors cannot take anything from your home³⁶.

If someone cold calls claiming to be National Debtline, be cautious. Some companies cold call people pretending to be National Debtline, Business Debtline or the Money Advice Trust³⁷. The genuine service does not cold call. Call National Debtline yourself on 0808 808 4000 to get free advice³⁸.