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What Happens If I Have Negative Equity In My Property?
Negative Equity
Much is being written these days about house prices dropping and the fact many property owners are experiencing negative equity; meaning the property is now valued at less than what is owed on the mortgage and any other charges.
For some this can be an issue, and for others it is not; meaning, the negative equity is not realised until you attempt to sell the property. As long as you continue to make the mortgage payments, you are OK. However, when you try to sell, the proceeds don’t cover the debt(s) on the property and there is a shortfall.
In bankruptcy if you were to let the property go back to the mortgage company, this shortfall can be included in your bankruptcy as it is now an unsecured debt.
If you were to just stay and live in the property, make your payments, etc, you may be able to ride out the property values dropping, as it always does swing back, and the property may appreciate back up to or exceed the mortgage and loan balances.
For some people they experience a loss or reduction in income and this coupled with other debts they have cannot continue to service the property and the debts and look at other options, bankruptcy being one as also is selling the property and scaling down. If there is negative equity this can hinder the scaling down and may force bankruptcy on them as they cannot sell or pay for the shortfall and their other debts.
What about property that is in negative equity and you want to keep the property and go bankrupt? They feel they can service the mortgage and property, but not all their other unsecured debts and want to go bankrupt.
A few things may occur: the Official Receiver may allow this and let them buy out the OR’s interest in the property under a low cost buy-out scheme, or they could place a charge on the property for three (3) years to see if any equity rises, or the OR may say they have to move as leaving them in negative equity is leaving them still in debt and the point of bankruptcy is to discharge all your debts.
The last option was a new one to me and something I have only just started to hear from people I have been speaking with.
There also always is the issue of affordability, as to if you can really afford the property or not; the cost to keep the property may be disproportionate to the household income.
So while it can get complicated and there are no sure fire answers as to what will occur with a property in negative equity in bankruptcy, this will give you an overview.
As to others whose property values have dropped, all we can do is hope over time they rise again and begin to cover any differences between the mortgage balances and the value of the property. But again, none of this is realised until a property is sold, or needs to be re-mortgaged.
Some people who have to re-mortgage as their current mortgage is ending or changing, will also find themselves in this situation. One can only hope the mortgage companies and the government can sort this one out.
If you have a bankruptcy question you’d like to ask, just ask using this online form. All help is free.
Source: What Happens If I Have Negative Equity In My Property?