Paying off your mortgage shortfall
If the money from the sale of your home isn’t enough to cover your mortgage debts, you will still owe the outstanding amount to your lender. You might be able to negotiate a repayment plan with your lender but they may decide to take you to court to get the money back. This has to be done within a certain amount of time.
How will I know if I have debts and, if so, how much?
When the property is sold, your lender will probably send you a detailed final financial statement. This will tell you whether any debt is still outstanding, and should include a detailed breakdown of all the costs involved.
You may be contacted soon after the repossession to ask how you intend to repay the debt, although they may give you time to get back on your feet first. It is quite common for several years to pass before legal action to get back the money you owe is started. It is very important to get independent advice before you reply to any letters asking how you intend to pay off your debt.
Mortgage indemnity guarantee
If you had to pay for a mortgage indemnity guarantee when you took out your mortgage, it will pay all or part of the shortfall to your lender. However, this doesn’t mean that your debt has been paid – it has simply been transferred from your lender to the insurer. The insurer can take legal action against you to get back any money it had to pay out. Your lender may take legal action on behalf of the insurer, or the insurer can do so itself.
When can action be started?
If the court made a money judgment when the possession order was made, there is no time limit on when legal action has to be started.
If the court did not make a money judgment, your lender has to start any legal action within a maximum of twelve years. However, the Council of Mortgage Lenders (whose members include all the main high street lenders) and the Association of British Insurers (which represents many mortgage indemnity guarantee insurers) expect their members to start action within six years.
If your lender or insurer contacts you after the six years has ended, get advice. You may not have to pay and you may be able to complain to the Financial Ombudsman Service.
How can the debt be repaid?
Your debts can be repaid over a number of years. It is usually possible to negotiate how this will be done, but you should get advice first. An adviser can help you to work out the best way to deal with your debt. Even if it’s impossible for you to pay off everything you owe, you may be able to:
- ask your lender to write off all or part of your debt
- pay a lump sum as a full and final settlement – your lender may accept an amount which is less than you owe
- make arrangements to pay off all or part of the debt in instalments over an agreed period
- declare yourself bankrupt.
Writing off the debt
It is very unlikely that your lender will agree to write off all your debt. This usually only happens in extreme situations, where there is very little chance that your situation will improve in future. However, some lenders will agree to write off part of the debt if you can make arrangements to pay off the remaining debt through a lump sum payment or regular instalments.
Lump sum payments
If you can afford it, you can offer to pay a lump sum on the condition that the rest of your debt will be written off. You may be able to do this by selling valuable belongings (such as a car) or by borrowing money from friends or family. You may also be able to take out a new loan to pay off your debts, but you should get advice first, and avoid loans with high interest rates.
Even if you can’t afford the full amount, your lender may agree to accept a lump sum payment as ‘full and final settlement’. If you want to do this, get independent advice first. If it’s not done in the correct way, through a formal agreement, your debts may not be cleared.
Paying by instalments
Your lender may allow you to pay off all or part of your debt in regular instalments over a number of years (usually within the original term of your mortgage). If you do this, your lender may be willing to write off part of the debt. It’s important not to agree to pay more than you can realistically afford.
Depending on your situation, you may decide to declare yourself bankrupt. If you do this, any assets you have can be used to pay off your debts during a period of two or three years. After this time, any remaining debts you have will be written off, and you will probably be discharged from bankruptcy. However, bankruptcy will have a big impact on your ability to get credit in future, so it is essential to get advice before doing this.
Where can I get help?
The best option for dealing with your debts will depend on your personal circumstances. A specialist debt adviser can help you to work out the most realistic way to deal with your debts. Call Shelter Cymru’s expert housing advice helpline on 08000 495 495 or email our debt advice team. If you prefer, click here to see if there is one of our free, specialist, independent, confidential debt advice service surgeries in your area.
An adviser may be able to help you:
- manage your income and expenditure and work out your options
- explain the reasons for your financial problems to your lender and/or insurer
- explain the steps you have taken to keep your debts to a minimum
- produce a detailed summary of your finances to show that you have very little money available to repay the debt
- organise and prioritise payments of any other debts you have.