In some cases you may need to sell or release equity from your house if you enter into bankruptcy. However, this can depend on whether you own or rent your home and who lives there. Bankruptcy is a state of personal insolvency where an individual can’t pay back their unsecured debts worth more than £5,000. It isn’t the only debt relief option, and other methods are available when it comes to individuals finding themselves in a difficult financial position.

After a bankruptcy has taken place and the appointed trustee has closed their file, your creditors will write off your unsecured debts. This allows you to make a fresh start. Bankruptcy usually lasts for 12 months, and you’ll have many financial restrictions during this period. After this 12-month period, you’ll usually be ‘discharged’ from it.

When am I considered bankrupt?

There are typically two ways of identifying whether you may be insolvent:

• Unable to pay bills
  If you are unable to pay your bills as and when they fall due and you are not able to meet your monthly requirements, you could be considered bankrupt.
• Liabilities outweigh assets
  If your outstanding liabilities outweigh the value of your assets, then you might also be considered bankrupt.

Some caution is needed when applying these two indicators bankrupt, as you may be waiting on a paycheque to pay your bills, or your liabilities might only temporarily outweigh the value of your assets, making you temporarily insolvent.

The process of bankruptcy is available to sole traders and individuals and is a way of managing and writing off your debts.

What will happen to my home in bankruptcy?

If you enter into bankruptcy and own a property, there is the possibility of your trustee in bankruptcy realising your home in order to repay your creditors. However, the trustee will only be interested in the property if it is wholly or partly owned by you and has available equity. If it’s believed that the amount of equity in the property is large enough to enable a payment to be made to the creditors, the trustee can enable a dividend from the asset in question.

What if my home has dual ownership?

If you co-own a property with someone, the trustee in bankruptcy will only be entitled to the bankrupt individual’s share of the equity in the property. This could mean that the house is forcibly sold, or the co-owner of the property could buy the bankrupt share.

You can sell and share the sale proceeds as per the terms set down in their joint ownership agreement, or they can buy the share of the bankrupt owner and pay the trustee.

How can I protect myself from bankruptcy and save my home?

By entering into a formal payment plan, you can in some circumstances protect personal assets such as houses.

• Repay your debts in a payment plan via an Individual Voluntary Arrangement (IVA)
  An IVA is a formal arrangement between you and your creditors, which allows you to repay your debts in one affordable monthly sum. It is a legally binding process, set up and managed by an insolvency practitioner. This amount is distributed to your unsecured creditors, e.g., store cards or self-employed business debts on a pro rata basis. The arrangement lasts for up to five years, and can offer greater protection to your assets. Once the arrangement concludes, your unsecured debts in the plan are written off.

What are the benefits of an IVA?

There are some key benefits of an IVA, to consider as an alternative to bankruptcy:

• Affordable monthly payments

  Your IP will analyse your outgoings and income, and tailor how much you’ll pay each month to your individual circumstances. This arrangement makes it easier to pay back your debts at an affordable rate.

• Some asset protection

  It’s almost expected that someone going through bankruptcy will have to sell their personal assets such as a car or home. Your personal assets will be considered when applying for an IVA, which protects them more than in a bankruptcy, so you shouldn’t have to sell them to pay off your debts.

  A breakdown of the IVA application process

• Unaffordable debt is written off after the IVA

  An IVA usually lasts five years, and afterwards, any remaining debt is written off as unaffordable. Doing so could reduce the debt you owe by a substantial amount. It takes away the worry of not knowing how you’ll repay your debts because they’re reduced in size to fit your affordability, while also allowing creditors to get some return.

• Creditor pressure and interest frozen

  Once the IVA comes into force, all interest on the debts is frozen, along with all creditor pressure. Even if a particular creditor didn’t agree to the proposal, if an IVA goes through, it is binding to all parties. The IP will deal with all your creditors after the arrangement comes into force, saving you the stress.

  Find out more about creditor pressure against individuals

An IVA avoids some of the restrictions associated with bankruptcy, such as the restriction on acting as a company director. Unlike in bankruptcy, an IVA can be structured in a way that keeps your home and personal assets out of the arrangement, so long as you keep up with the repayments.

In summary

Bankruptcy is a legal insolvency process for individuals who cannot pay their debts. A creditor can petition for bankruptcy if they are owed at least £5,000. It isn’t the only debt relief option, and other methods are available. While it may be considered a last resort when those other solutions aren’t viable or have failed, it can be the most suitable solution for some. Large personal assets or belongings such as property could be forcibly sold to raise money for your creditors, even if they’re jointly owned.

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