Negative Equity Affects Debt Management

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Around a million home owners, mainly in the North of England, are thought to be in negative equity due to falling house prices according to a recent report from the Council of Mortgage Lenders (CML).Their research suggests plummeting property values means about 900,000 people have a home worth less than their outstanding mortgage debt and that number may rise as high as 1.18 million the CML warned. That’s heading towards the 1.5 million households who were in negative equity in the depths of the last housing market recession in 1993.

The worst cases were amongst those who took out mortgages between the second quarter of 2005 and the end of 2008, with people who took out mortgages in the second and third quarters of 2007 (when house prices were at their peak) most severely affected.
Further falls in house values are likely, although the areas worst affected by negative equity differ this time round from those which suffered 16 years ago.Almost one in 10 owner-occupiers are in negative equity in the North of England, while East Anglia, which suffered badly in the 1990s, has remained relatively untouched as has Scotland with just 1% of owner–occupiers in negative equity.

This situation may have relatively little immediate impact, other than to make people sit tight while waiting for house prices to rise again or may affect the levels of re-mortgaging or secured loan applications. However, it does further limit the options for homeowners who may also be facing general debt problems. The option of obtaining a consolidation loan will not be possible as there will be insufficient equity in the property.

The only remaining course may appear to be bankruptcy, which is a cheap way to resolve a debt situation.It costs around £500 to make yourself bankrupt at the local County Court, but this is very much the “nuclear option” and does have severe and long lasting consequences.
For those facing negative equity, the IVA (Individual Voluntary Arrangement) becomes an even more attractive proposition in managing their debt. This is a legally binding deal lasting five years that’s brokered by a licensed Insolvency Practitioner who puts forward a single repayment proposal of somewhere between 30-%-50% of what’s owed to all the creditors.

Your creditors then vote to decide whether to accept the proposed, which if agreed is binding on everyone, even those who didn’t vote or voted against it. Ordinarily, if you own property, those creditors will expect you to re-mortgage or sell the property to pay off the debts in full, but evidently if you are in a position of negative equity you cannot do so, therefore it’s more likely that the IVA will be accepted in those circumstances.

So, If your total debt is more than £20,000.00 to at least three creditors and you are a homeowner with a level of equity in your property that’s now less than the total of your unsecured debts, an IVA proposal is worth investigating Unlike debt management, an IVA is a “full and final” settlement which means that any debt still outstanding at the end of the IVA is permanently written off and you are free of debt and there may even be circumstances in which you can keep your home into the bargain.

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