Mark, a police officer, is about to have his home repossessed by his mortgage lender. Sold at auction, it is expected to fetch around £44,000 less than Mark's outstanding mortgage.
Combined with his credit card and personal loan debts, which total around £46,000, this will take Mark's final debt to at least £90,000.
As the debt is so high, in my opinion, there is only one solution – bankruptcy. Mark's marriage has also broken down and, due to the separate living costs, he has no spare money at all each month with which to repay his liabilities.
Most people think that once they go bankrupt, that's it and all the debts – including the shortfall on the previously mortgaged home – get wiped clean. But do they?
More pain in store
Not necessarily. The mortgage lender may spring something upon the bankrupt that could have devastating consequences in years to come.
When a borrower voluntarily surrenders the home and hands back the keys, the mortgage lender will request that some forms are signed. Among these can lurk a particularly sinister form called a Deed of Acknowledgement (DoA).
The purpose of this is for the mortgage lender (or secured creditor) to ensure there can be no dispute as to the amount of any shortfall when the house is sold, and act as an agreement that can hold the borrower to repaying some of the bankruptcy debt over the next 12 years.
Some lenders will insist that the keys to the home cannot be voluntarily surrendered without signing the DoA – and worse still, the document can also be sent to any non-bankrupt joint owner/borrower if the property was previously jointly-owned.
But don't be misled by the lender; you CAN surrender your home by posting the keys, recorded delivery, or handing them to the official receiver without having to sign the DoA.
What if I have already signed the DoA before bankruptcy?
If you have already signed the DoA and are not yet officially bankrupt, the best you can do is state you want to include ALL of your debts within the bankruptcy, including any shortfall in sale of the house.
Unfortunately however, there is no guarantee as to whether this shortfall issue would be accepted by the Official Receiver (OR).
There can be a clause in the DoA whereby you, the previous borrower and now shortly to be the bankrupt, agree that this debt will not be included in the bankruptcy – but you will pay it after the bankruptcy has concluded.
What if I signed the DoA AFTER the bankruptcy?
The biggest concern for the bankrupt will be that, if they sign a DoA after being declared bankrupt, new debt might be created for the secured element. However, this would exclude legal and repair costs as these would be unsecured and would have been included in the bankruptcy.
What the Insolvency Service says
Bankrupts cannot expect to be protected from the perils of the DoA by the Official Receivers.
A spokesperson from The Insolvency Service said, "The Official Receiver (who would only be involved once the person is already bankrupt) should not object to the completion of a DoA if he/she becomes aware that the bankrupt has been requested to provide such a deed.
"Instead the Official Receiver should suggest that the bankrupt seeks his/her own legal advice. It is not for the Official Receiver to influence the bankrupt about how to proceed in this matter".
If the mortgage shortfall debt is in joint names then, as with any joint loans secured or unsecured, the non-bankrupt joint owner will be liable for the appropriate portion of the debt whether a DoA is completed or not.
For the record, mortgage lenders have six years to recover the interest element of the debt and 12 years for the capital sum, this being from the date of the last payment on the account or acknowledgement.
By signing the DoA the 12-year time limit therefore starts the day you add your signature.
Some debt advisers argue that a post- bankruptcy DoA is unenforceable whilst others say it still could be pursued.
The simple and best advice to avoid all this is, don't sign it!