Home equity loans and bankruptcy in the UK

Bankruptcy does not make a loan secured on your home disappear or guarantee that you can keep the property. This guide concerns England and Wales; Scotland and Northern Ireland have different procedures.

The lender’s security and the bankruptcy trustee’s interest in your assets are separate issues. Get advice on both before making decisions about the home.

In this article, we’ll address the following questions:

• What happens to home equity loans after bankruptcy?
• What is a Deed of Acknowledgement?
• Does discharge return the home to you?
• Can you get a line of credit with a bankruptcy?
• Is it possible to get a home equity loan after bankruptcy?
• What are the pitfalls of a home equity loan?

Speak to a free debt adviser before securing other debts against your home or applying for bankruptcy.

Ready to find out what happens to home equity loans after bankruptcy? Let’s get started!

What happens to home equity loans after bankruptcy?

A bankruptcy discharge does not remove a lender’s right to enforce security over your property. US Chapter 7 and Chapter 13 rules do not describe bankruptcy in England and Wales.

However, the home equity loan provider still has the right to the security within the credit agreement – i.e. your property. 

If you want to remain in the home, get advice about keeping secured payments up to date and whether the trustee can realise your interest. Continued payments alone do not guarantee that the property will be retained.

What happens if the home is repossessed?

A secured lender may seek possession and sale through the applicable legal process if payments are not maintained. The trustee can separately deal with your interest in the property under insolvency rules.

Sale proceeds meet the costs and secured claims in their legal order of priority. If proceeds are insufficient, a shortfall may remain. A shortfall arising from a pre-bankruptcy mortgage will generally be a bankruptcy debt, but the timing and documents matter.

What is a Deed of Acknowledgement?

A lender may ask you to sign a deed of acknowledgement or a new promise to repay a mortgage shortfall. Depending on its terms and timing, this could create a new liability.

Do not sign a new acknowledgement or repayment promise without independent advice. Your bankruptcy does not normally remove a joint borrower’s liability.

Does discharge return the home to you?

Discharge usually occurs after 12 months in England and Wales, but it can be delayed. Restrictions or income-payment obligations may continue.

Assets already vested in the trustee are not automatically returned on discharge. Specific time limits and rules apply to dealing with a qualifying family home; obtain advice about your situation.

Can you get a line of credit with a bankruptcy?

While bankrupt, you must disclose your status when seeking credit of £500 or more. Longer restrictions can apply under a bankruptcy restrictions order or undertaking. After discharge, lenders still assess your history and affordability.

Getting any kind of loan after bankruptcy is usually challenging, including unsecured debt – but it’s not impossible. 

Home equity loan after bankruptcy discharge – is it possible?

After discharge, secured borrowing may be possible if you retain a suitable property interest and meet the lender’s checks. Approval is not guaranteed, and a US-style HELOC should not be assumed to be a standard UK product.

Whether the application will be accepted will depend on the lender, affordability and your credit history. 

Bankruptcy normally remains on a UK credit file for six years from the bankruptcy order. Lenders can still ask about past bankruptcy after that period; answer questions accurately.

Pay off debts – bankruptcy Vs home equity loan?

Some homeowners consider a secured loan to consolidate other debts. Employment status alone does not establish eligibility: the lender must assess the relevant income, commitments and affordability.

A lower monthly payment can mean a longer term and a higher overall cost. Securing previously unsecured debts puts the property at risk; compare fees, total repayment and other debt options.

Some people may be weighing up a home equity product to consolidate debts against bankruptcy. This is best discussed with a finance professional who can assess your personal circumstances and provide informed advice. You could also chat with Citizens Advice about your options. 

What are the pitfalls of a home equity loan?

The biggest pitfall of taking out a home equity loan is not being able to keep to the repayments. If this happens you could have the property repossessed and sold. To mitigate the risk of failing to repay, you should only borrow what you need, not what you can get. 

Compare all fees, interest, the term, early-repayment charges and total repayable. Your home may be repossessed if you do not keep up repayments on a loan secured against it.