If your property is repossessed you could be left with a mortgage shortfall. Depending on its size this new debt could be added it to your existing IVA.
- What is a mortgage shortfall?
- Can this debt be added to an existing IVA?
- Is it better to let your IVA fail and go Bankrupt?
- How to avoid repossession during an IVA
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What is a Mortgage Shortfall?
If you cannot afford to pay your mortgage it will fall into arrears. If this situation continues the lender will eventually be forced to repossess your home.
They will then sell it to recover the outstanding mortgage debt. If the sale price achieved is less than the debts secured against the property the amount still outstanding is called a mortgage shortfall.
You and anyone else named on the mortgage are personally liable for this debt. However it is now classed as unsecured because the property it was secured against has already been sold.
After a repossession the mortgage lender may sell the property at an auction. In these circumstances the sale price could be relatively low and a mortgage shortfall is increasingly likely.
Can Mortgage Shortfall debt be added to an existing IVA?
Because it is unsecured it is possible to add mortgage shortfall debt to an existing IVA. However if the amount owed is more than 10% of the total already included in the Arrangement the addition can only be agreed with a formal Variation.
Mortgage shortfall debt is usually relatively large. As such agreement of a Variation by the original creditors will almost certainly be required before it can be added.
If the alternative is the failure of the Arrangement the Variation may well be accepted. However in return the creditors are likely to demand an extension of your payments.
In return for adding a mortgage shortfall to your existing IVA you may be required to extend the Arrangement for 1-2 extra years.
Is it better to let your IVA fail and go Bankrupt?
If your mortgage shortfall is large compared to the debt already included in your IVA it may not be impossible to add it. Alternatively you may not be happy to accept a significant payment extension.
Faced with this situation one option is let your IVA to fail and go bankrupt. Given you no longer have a property to protect you may have nothing to lose by doing this.
All your outstanding debt including the shortfall will be written off by the bankruptcy. However you should remember if you have disposable income you will still be required to make payments towards the debts for up to 3 years.
Bankruptcy is not your only option. But because you no longer have a property to protect it could well be the fastest way for you to become debt free.
How to avoid Repossession during an IVA
One of the benefits of being in an IVA is that it should free up cash so you can pay your mortgage on time. If you are unable to do this the amount you pay into the Arrangement may have been incorrectly calculated.
You must speak to your management company and explain the situation. They may be able to reduce your payments so that it is easier for you to pay your mortgage.
If you have already fallen into arrears you may also be able to take a payment break from your IVA. This would give you a breathing space and enable you to repay the mortgage payments outstanding.