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If you’re reading this article, it’s probably because you’re in debt and you’re looking for answers. Helpful advice can be obtained for free from charities such as StepChange and Citizens Advice; some of which will be referenced in this article.
Royal College of Psychiatrists say that debt can cause – and be caused by – mental health problems. Whilst it’s tempting to ignore the issue, debt can be uncomfortable when it makes you feel guilty or more depressed, whilst putting you and your family under financial and emotional strain until you regain control of your finances. Sorting out money problems sooner rather than later will help you to feel better about your situation and will help you to stay well mentally.
There are so many reasons someone might be in debt, but if you own a property and you’re considering selling that property to clear your debt – or part of your debt – read on to find out more.
Here are some examples of situations that can push you into debt, or make an existing debt even worse:
If you’ve lost your job, lost a loved one, ended a relationship with your partner, it will be easy to fall into debt due to being in new situations.
Mental or physical illness can push someone into debt. If you lose your job – or have to spend a lot of time off work – you won’t have so much money and you might have to spend more prescriptions, or travelling to find work.
If your employer can’t afford to pay you, or your benefits have changed, been missed or even stopped, a lack of income can easily result in debt.
If your income is below the average, you are likely to get into debt. If you have to live on a low income for a long time, your debts can mount up and it could be that you just can’t get by without borrowing money.
There are always going to be essential purchases – such as a washing machine or car repairs – but spending sprees and buying stuff that you don’t need can quickly lead to being in debt.
You can easily get into debt from ignoring paperwork and bills. If you’re mentally unwell, you could find it too much to think about money and bills, but unfortunately, the problem won’t go away. Speaking to the utility companies can be a good first step.
Now let’s look at the different types of debt.
A key to financial success is to prioritise the most expensive loans.
Contrary to what you may think, some types of debt can be considered to be good because they strengthen your credit rating. Meanwhile, other bad types of debt have a negative impact on your financial record. A mortgage is considered to be ‘good’ debt because the value of your property is likely to increase over time. Loans taken out with low interest rates also tend to be perceived positively.
Bad debts are those such as payday loans and credit cards. When considering whether or not to sell your house to clear debt, think about how paying off the debt will affect your financial future.
Dealing with ‘high priority debts’ first is an excellent step to take. These would include:
(these can result in you losing your home)
Meanwhile, you might have debts that could be deemed as ‘non-priority debts’. You can’t go to prison for not paying a non-priority debt, although creditors could decide to take you to court. If you fail to follow a court’s order to pay these debts, bailiffs or sheriff officers could be forced to seize your property. A ‘non-priority debt’ would be (for example):
Being in debt is nothing to be ashamed about. According to Gov.UK, February 2022 saw 588 bankruptcies registered; 36% lower than in February 2021 and 62% lower than February 2020.
There were 2,242 Debt Relief Orders (DROs) in February 2022; 61% higher than in February 2021 but lower than pre-pandemic levels (6% lower than in February 2020).
Gov.UK also reports that there were, on average, 6,384 Individual Voluntary Arrangements (IVAs) registered per month in the three-month period ending February 2022. This is 4% higher than the three-month period ending February 2021 and 15% higher than the three-month period ending February 2020.
If you’re in receipt of benefits, or on a low income, you may find that you simply don’t have enough money to cover your outgoings.
Working out your income and your outgoings can help. Make yourself a spreadsheet that shows the households’ income each month, and then the necessary outgoings, such as mortgage payments, credit cards, loan payments, insurance policies, utility bills, and costs such as food and petrol. This will help to show the difference you need.
If your debt isn’t too high, this can help you get on top of it by showing how you can make a few changes to make a saving and reduce the debt. However, if your debt is high, that’s when other steps need to be taken.
Having a credit card debt could mean that you’ll be able to transfer the debt to a credit card that charges 0% interest on balance transfers for a fixed period. That way, your monthly credit card payment will go towards clearing the debt rather than paying interest on the loan.
Alternatively, you may have thought about having a consolidation loan. This is where your bills, loan repayments and other outstanding debts are rolled into one monthly payment. If you have multiple credit card accounts or loans, consolidation may be a way to simplify your payments. Unfortunately, it isn’t quite that straightforward. Many of the low interest rates for debt consolidation loans may be so-called ‘teaser rates’ that only last for a short time. After that, your lender may increase the rate you have to pay. Also, the loan is likely to include fees or costs that you would not have to pay if you continued making your other individual payments. And, although on the surface things might look brighter because your monthly payments are lower, you might be paying over a longer time. This will mean that you’ll be paying a lot more overall.
Finally, taking on a new debt in order to pay off an old debt might just be ‘kicking the can down the road’ as the saying goes. Or in other words, saving up the problem for the future. Often, the way to pay off a debt is to lower spending or increase income; not taking on another debt that comes with admin fees and interest rates.
Being in a lot of debt doesn’t automatically mean that you need to sell your home. For example, if you’ve recently lost your job or become ill and you’re in arrears with your mortgage payments, you can contact your lender and ask them about options that are available, such as putting things on hold until you’re in a better financial position. Taking control of your debt is always going to be the best way to deal with it and will enable you to improve the situation, rather than fall even deeper into debt. You could also be in a position to receive state benefits. Talking to advisors at your Citizens Advice office will inform you about this.
Selling your house should be the last resort to solving your debt, but sometimes it may seem like the only option that’s available to you. However, there are still things that you could consider before you sell your property.
The charity Stepchange says that in certain circumstances, it makes financial sense to release money tied up in an asset to help you reduce or clear debts.
In essence, an asset is anything you own that has a value, so if you have assets that you’re willing to sell, such as a car, watch, bike, caravan, furniture or other valuable items, you could consider selling them to release money and use it to help you while you’re struggling. Remember to find out if you’ll need to pay fees or commission if you’re selling through an app or a website because the money you receive won’t always be the full sale price.
An IVA is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time. This means it’s approved by the court and your creditors have to stick to it. IVAs can be flexible to suit your needs but it can be expensive and there are risks. We’ll look at IVAs in more detail later on.
Only an insolvency practitioner – a lawyer or an accountant – can set-up an IVA for you. Importantly, they will charge fees for the IVA, so keep that in mind before accepting. These fees can often be high and are based on the amount you pay back through the IVA. The insolvency practitioner will deal with your creditors throughout the life of the IVA.
If you go to a debt management company for an IVA, try to find out how much they will charge. A debt management company is likely to be more expensive because they charge a fee on top of the insolvency practitioner’s fees.
When you choose to get an IVA, you’ll work out a repayment plan with the insolvency practitioner. This could be monthly payments, a lump sum or a combination of both.
The repayment plan should be based on an amount you can reasonably afford and the creditors will need to agree to it. If you’re making monthly payments the IVA will usually last for a number of years.
Any repayments will be paid directly to the insolvency practitioner. They will then distribute the money to your creditors. Some of this will be kept by the insolvency practitioner to cover their fees. If the payments you make aren’t enough to pay your debts in full by the end of your IVA, you won’t have to pay the rest. The insolvency practitioner will advise you about this.
Importantly, if you receive a windfall during your IVA – such as an inheritance – it will usually be taken and paid to your creditors. And if you learn that you’re due to receive a sum of money from something that happened before the IVA, your creditors might have the right to claim it too, even if your IVA has finished.
Selling your house to pay off debt is often a last resort but will ultimately depend on the situation you’re facing. While it may seem like the easiest way to quickly acquire a large sum of money, you’ll need to consider the long-term implications of selling your property.
Selling your home to release equity won’t work for everyone; it will only work if your home is worth more than the amount you owe. You can work out how much your home is worth by subtracting your remaining mortgage balance from the property’s market value. For example, if you owe £100,000 on the mortgage on your home and it’s worth £205,000, selling it would leave you with £105,000 in equity (assuming it sells for the full amount, and ignoring selling fees).
However, if the market value of your property falls below the outstanding mortgage amount, you’ll be in negative equity.
When the money from the sale of a property is not enough to repay what you owe, it’s called a shortfall and you’ll have to pay this difference. Having a government loan called ‘support for mortgage interest’ won’t be part of the shortfall and the government will cancel your loan if you don’t have enough money to pay it back.
Your mortgage lender, however, will send you a bill for the shortfall on your mortgage. You might also get a bill from another lender if you have another loan secured on your home. If you are unable to make an arrangement to repay it, your lender could take you to court to force you to pay this outstanding amount.
If you don’t pay off the mortgage shortfall and then buy another property, the lender of your first property may take court action against you. If they get a court order against you and you don’t pay up, they could then apply for a charging order against your new property. This means that, when you sell the new property, the proceeds of the sale will be used to repay the shortfall. It is also possible that your lender could get an order for sale of your new home to repay the debt on the previous one.
If you owe a shortfall on your mortgage after you have been evicted for mortgage arrears, seek free expert advice from your local Citizens Advice Bureau.
If you can’t pay your mortgage, you may be tempted to:
This ‘head in the sand’ approach is not the solution and as we mentioned earlier, taking control of things yourself is always going to be to your benefit.
If you have no other options for paying your mortgage, try to sell the property yourself, rather than handing back the keys or doing nothing. Until the property is sold, you are still going to be responsible for mortgage payments, buildings insurance and other costs.
Properties that are sold after the owner has been evicted (called repossessions) or when the keys have been handed back to the lender often sell for a lot less than they normally would. As a result, you could find that the sale doesn’t bring in enough money to cover what you owe and you still have a debt to pay.
As we’ve touched on before, being repossessed will damage your credit score and make securing a mortgage incredibly difficult in the future, so selling your house rather than waiting until you’re repossessed means that you stay in control. If your house is repossessed, your lender will most likely sell your house in an auction which will usually result in a lower sale price. Selling yourself means you can get a better price, giving you more money to rectify your situation.
Citizens Advice suggest that there are several things you will need to think about if you’re considering selling your property:
With all of that in mind, let’s look at other elements to think about right now.
This might seem obvious, but it’s surprising how often it’s overlooked. If you’re selling your property, you’ll need to think about where you are going to live.
If you don’t have anywhere else to live, you could apply to your local authority (council) to be re-housed as homeless. Talking to your local authority as soon as possible about this will be to your benefit because in some circumstances they will consider you to be intentionally homeless and may not consider re-housing you. This will also apply to people who have handed back the keys to their mortgage lender and walked away from their property.
In the event that you can’t afford to buy another property after repaying your debts, find out if you can afford to rent. You’ll usually have to pay a deposit and one month of rent upfront, but this could be a way of keeping a roof over your head if you have an income to cover the rent payments and other costs (such as bills and council tax).
Alternatively, depending on how many possessions you have, would it be possible for you to live with friends or family for a short time? Doing this would help you to save until you can afford to get your own place again.
Land registry restrictions are a way of someone protecting their interest in a property. They are common in the event of a relationship breakdown when both partners jointly own the property.
Whether or not you can sell your house with a restriction on it will depend on the specific restriction that has been placed on your property. It’s important to make sure you understand the implications of the restriction and seek independent legal advice if necessary to find out if a sale can go ahead.
If you plan to sell your house with a secured loan on it, your solicitor will contact anyone who has a charge registered against the property (usually, this will be your mortgage company and any other company connected to loans you have secured on the property) and ask for a settlement figure. The expectation will be that any loan secured on the property will be settled in full at the time of the sale completing.
In the event that the price achieved for the property is not sufficient to repay both the mortgage and the secured loan, the sale will not be able to complete before you make alternative arrangements with the lender or lenders.
However, if you know that the sale of your property is not going to cover the repayment of the loan or loans secured against it, you’ll need to get in touch with your lender as soon as possible to make alternative arrangements. You may find that your lender is able to change the loan to an ‘unsecured loan’ or work with you to find a different solution. Keep in mind that this can be a time consuming and complex situation to sort out, so it’s important to contact your lender as soon as possible to avoid the sale of your property from being held up, or even falling through.
Downsizing to pay off debt can be a great option if you’re able to clear the debt and still afford a property. Whether or not you’ll be able to get another mortgage after selling your house to pay off debt will largely depend on your credit score and financial history. Formal debt management solutions such as IVAs and bankruptcy will have an impact on your credit score, which in turn will have a negative effect on your ability to access financial credit and loans.
Before making any decision to sell your house and downsize, you’ll need to consider the following:
Selling your home is a big step and you should always get expert advice before deciding to do it. However, if you choose to sell your house to pay off debt before you get to the point of needing to use formal debt management services, and there are no other ‘black marks’ on your credit file (such as missed credit card payments), you shouldn’t have problems getting another mortgage that’s in-line with your new affordability levels.
An independent mortgage adviser will be able to give you more information that’s relevant to your particular circumstances.
An important consideration is if your financial troubles are short-term or long-term. Earlier, we looked at reasons for people getting into debt, so is your money drought the cause of a sudden change in circumstance, or are you in long-term debt? If you are in long-term debt, is it because you have difficulty managing money? If so, will selling your property keep you out of debt?
If you do decide to sell your home, there’s the cost of selling to factor in to your sums. Selling a property can be an expensive process, with estate agent commission, solicitor fees and conveyancing costs all taking a massive chunk out of the equity you’ll receive from the sale. You’ll need to ask yourself if you can afford to pay these fees (even if the house sale falls through), and if you’ll make enough profit to pay off your debt?
If you need to sell your house to get out of debt, without incurring these selling fees, you’ll want to sell your property to a quick house sale cash buying company.
A cash buying company is a property buying business that will quickly buy your home at a discounted price. The result is that you can sell your house fast without the hassle you’d have if you sold to a private buyer that is in a chain. It is possible to sell a property in just 30 days if you use a cash buyer, which may be what you need in order to avoid repossession. And because they’ll often be using their own money, no time is wasted sorting out mortgages and they won’t be in a chain so the sale should be straightforward. Not all cash buyers are cut from the same cloth, so you’ll need to do some checks before signing on the dotted line.
For your own security, check that the company is a member of the National Association of Property Buyers (NAPB) and The Property Ombudsman. This will give you independent help if there’s a dispute and also means that they have to abide by a code of conduct. Get everything in writing, for extra peace of mind. This way, you can recheck any details and you’ll have evidence of the price that was offered to you for your property. And on that topic, make sure that the offer they give you for your property is fixed. It’s not uncommon for some less scrupulous companies to reduce their offer at the last minute, leaving you with little choice but to accept. This isn’t what you need when you’ve got debts to repay and you’re up against a deadline.
We hope that this article has answered questions you have about debt and selling a property to repay an outstanding debt. If you would like a confidential, no-obligation chat with us about a fast cash sale, our experts are available 24/7. Send an email or call us for more information.