Can you get rid of debt for good?
“Help, I can’t believe this is happening,” gasped the man on the phone, “Surely they can’t do this, my house was repossessed 10 years ago and now they’re chasing me for more money!”
I get quite a few calls like this from desperate people that have previously had their home repossessed and not heard anything for years but then, right out of the blue, a solicitor’s letter drops on the doormat demanding thousands - in this particular case £66,381.
Why are lenders coming back years later?
It’s not unusual for lenders to sell a repossessed property at auction for a lot less than what the previous owner thought it was worth. This means the sale price often doesn’t cover the mortgage so the lender has to recoup the costs. It will likely add to this interest, arrears, administration, disbursement, court fees, selling costs, advertising, locksmith and gardener charges.
So what can be done?
If contact is made you do have options. One is to refuse to pay anything and rely on the outcome of any legal proceedings that the lender or their agents may well begin against you.
Most people, however, do one of the following: go bankrupt to wipe out the debt and any other debts, propose an Individual Voluntary Arrangement (IVA) and include the lender’s claim, or make an offer for a full and final settlement.
Sometimes this settlement figure can be between 5% and 10% of the claim. So in the example of the above claim of £66,381 this would be anything from £3,300 to £6,600.
With skilful negotiation a full and final settlement can be reached by paying a fraction of the initial claim. However, every case is determined on its merits and may take into account whatever assets you may have. The lender or agent will be trying to see whether they can put the debt they say you owe onto your current home, if owned, or whether you can pay back something each month.
They know that it’s unlikely you are going to be able to pay the full amount, so they are generally open to an offer.
If you have substantial equity in your current property, however, then you are at greater risk as the lender or their agents know they can secure the debt on your current home and they won’t accept a lesser sum, as illustrated above.
Mortgage Indemnity Guarantee (MIG)
If you do decide to settle on an amicable basis then ensure the MIG is included. MIGs are controversial, as the borrower has to pay a premium for the benefit of the lender.
A condition of any claim is that the lender must try to recover the loss from the borrower and pass it on to the insurer. However I know of cases where the lender has separately claimed from the borrower the amount that the MIG may not cover. Make sure you have settled the matter in whatever agreement you come to.
Time limits to recover mortgage shortfalls
If your property was repossessed more than 6 years ago and you’ve not had any contact from the lender or an appointed agent then you should cite the Council of Mortgage Lenders (CML) directive, which came into force on the 11 Feb 2000. This directive says those who have not been contacted by the lender for more than 6 years from the date of the sale of the property will not have to repay their mortgage shortfall debt.
Unfortunately this is a voluntary code and applies only to new cases and not those with existing shortfall debt repayments or where the lender has already started recovery procedures.
If the lender obtains a 'money judgement' (MJO) at the time of the repossession hearing then there is no set time limit for recovery of the debt. However, if the MJO is 6 years old then the lender has to reapply through the court, otherwise lenders need to abide by specified limitation rules.
Generally, lenders have six years in which to recover interest and twelve years for the capital sum. This limitation begins when:
• The lender is first able to issue proceedings (which would be much earlier than the date the property was repossessed) or,
• The last time any payment was made irrespective of the amount, or
• The last time the debt was acknowledged by the client or his/her agent in writing.
Joint names on the mortgage
If the debt is of a joint nature and only one of the party concerned is making a payment then the other person can still be bound by the time limitation, even without their knowledge and if they are separated or divorced. The 12-year time limit will start again, from the date of the last payment or acknowledgement.
Acknowledging the debt
Telephoning a lender just to enquire about the debt is not regarded as acknowledgement. Generally, for the time limit to start again, the acknowledgement must be in writing and signed by the debtor/borrower or his or her agent.
Those borrowers that have had a home repossessed need to address the situation sooner rather than later. Lenders do not pursue a distressed borrower immediately after repossession because they know that money worries led to losing the home.
They do, however, have a habit of popping up many years later, maybe when you are in another home, possibly married with children and earning good money, and just when you thought you'd left your debt behind you.
If you are worried about a mortgage shortfall debt then it is important that you take legal advice as case law can change.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
Mortgage indemnity guarantee
An insurance policy taken out by a lender to protect itself from the risk of the borrower, falling behind with payments or if the lender has to repossess the property and sell it for less than the outstanding mortgage secured on it. Lenders impose MIGs on borrowers or property they perceive to be risky and although the MIG acts as a form of additional security for the lender, the borrower pays for it, even though it offers the borrower no additional security whatsoever.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.