Bankruptcy

[Schnikki]

If someone has a legal charge over my house in exchange for a loan of 100,000, if I'm declared bankrupt, is it my trustee who deals with the debt?

[Ethel]

Yes

[themas]

Not normally. Secured creditors have a choice when someone goes bankrupt. They can either put the debt owed to them into the bankruptcy or rely on their security. If they do the latter (which they almost always do) the Official Receiver/Trustee is not initially involved in relation to that loan. This is the case with mortgages as well as any other loan secured on the house.

The OR can become involved because - if there is equity in the house (i.e. the sale value less selling costs is more than the total outstanding secured mortgages/loans) - the OR/Trustee will want the house sold to realise this equity for the other creditors. In this case, the secured loan would be paid off on sale. (If the equity is small, you may be able to buy out the OR's interest by getting a relative or friend to purchase a beneficial interest in the house and hand the money to the OR. There is a booklet on the Insolvency Service website about bankruptcy and the home which has info on this.)

Also, if you do not have the money to go on paying the secured mortgages/loans the house will be repossessed unless you sell it first. If it is sold and money is still owed to the secured lenders this becomes a debt in the bankruptcy & is treated in the same way as unsecured debts.