A mortgage shortfall occurs if your property is sold for less than the amount you owe on the mortgage. It can happen after a property has been repossessed.
- Are you liable for a Mortgage Shortfall?
- Can a Mortgage Shortfall be included in an IVA?
- Will your Mortgage Lender agree to the Arrangement?
- Is Bankruptcy better if you have this type of debt?
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Are you liable for a Mortgage Shortfall?
A mortgage shortfall is the amount of any mortgage or secured loan still outstanding after the sale of a property. It will come about if the property is sold for less than the mortgage or loans that were secured against it.
Such a shortfall will often exist after a property has been repossessed and sold in an auction. In these circumstances the amount raised is likely to be far less than might have been achieved in a private sale.
The most important thing to understand in regard to this situation is that the home owner is still liable for the repayment of any shortfall. The bank is still owed the money and has up to 12 years to force it repayment by legal means if necessary.
You and anyone else named on the mortgage or secured loan agreement are liable for any mortgage shortfall after the property is sold.
Can a Mortgage Shortfall be included in an IVA?
Any mortgage shortfall that exists after a property has been sold is now an unsecured debt. As such you can deal with it using an IVA. However you need to be aware of some implications.
The first is that if you start an IVA you will have to include all of your unsecured debts including any credit cards or personal loans. You may not be having any problems paying these currently. However legally they would all have to be included in the Arrangement.
Secondly if your mortgage was in joint names with someone else you will need to use a Joint IVA. If only you enter into the Arrangement the other party will not be protected. They will remain liable for 100% of the outstanding debt.
Mortgage shortfall debt is unsecured. As such it can be included in an IVA.
Will your Mortgage Lender agree to an IVA?
Before an IVA can start it must be agreed by your creditors. Because the mortgage shortfall is likely to be your largest debt (often by some margin) the mortgage company will have to be in agreement for the Arrangement to be accepted.
Generally speaking most mortgage companies will accept an IVA proposal as long as it is reasonable. They must be convinced that you are making your best effort to pay as much as you possibly can.
Very often only a relatively small percentage of the mortgage shortfall you owe will be paid back through the Arrangement. However the lender will still consider it seriously because they understand it is likely to be a better return than if you go bankrupt.
Your creditors will accept an IVA if they believe that the amount they will receive through the Arrangement is better than if you went Bankrupt.
Is Bankruptcy a better solution if you have a Mortgage Shortfall?
An IVA is not the only solution you can consider if you have a mortgage shortfall. Given you no longer have a property to protect you could also consider going Bankrupt.
Bankruptcy sounds bad. However for non home owners it is normally no worse than starting an IVA. Neither your landlord or employer are likely to be told. In addition your credit rating will be effected in exactly the same way and for the same length of time.
Another advantage of bankruptcy is that you many not have to make any further monthly payments towards your debt. You will only be required to do so if you have a surplus income and then only for 3 years compared to paying for 5-6 years in an IVA.
Given you are not a home owner if you apply for an IVA and it is rejected bankruptcy may be your next best option. You are unlikely to have anything to lose.