When a home owner finds that they are no longer able to maintain their mortgage payments they may have to hand back the keys to the property and move out. Bankruptcy is then the easiest option to write off outstanding debts and start again debt free. After the changes brought in by the enterprise act of 2002, the rules surrounding bankruptcy were amended. Most significantly, the period that a person remains bankrupt in most cases was reduced from 3 years to 12 months.

It was suggested by many that these changes revolutionised the bankruptcy process making it much easier for an individual to go down this route. In reality however, the main reason why people avoid bankruptcy has remained unchanged. This is that they are home owners who do not want to risk losing their property. The loss of property is a likely outcome if a home owner declares bankruptcy because if there is any significant equity, the house will normally be sold to realise this for creditors.

However, this reluctance to declare bankruptcy no longer applies if the homeowner is already resigned to leaving their property. In a situation where an individual knows they are unable to continue to pay the mortgage on their property, it is likely to be repossessed by the mortgage company and they will have to move out. If the individual has unsecured debt outstanding (which will almost always be the case given a likely mortgage shortfall), bankruptcy becomes a very real option as there is no longer a property to lose.

For people who know they will have to leave their property and then want to deal with their unsecured debt liability, the bankruptcy process is relatively simple. The first step is to move into alternative rented accommodation. This should be done before declaring bankruptcy to aid the credit checking process. Once done, the mortgage company can be told that the mortgage on the old house will no longer be repaid and that the house should be repossessed. At this stage it is advisable to complete a voluntary surrender form confirming to the mortgage lender that the property has been vacated. The local council should also be informed so that council tax is no longer charged.

The bankruptcy process can then be completed including any estimated mortgage shortfall in the list of unsecured creditors. This and any other secured debt will be written off by the bankruptcy. In 12 months, the individual will be discharged debt free to continue with their life.

Of course, a solution like this is not suitable for everyone. For example, you cannot continue as a company director if you declare bankruptcy and as such, bankruptcy is not generally possible for directors. However, for the vast majority of people who have no property, the downsides to bankruptcy are minimal. As such it is often an excellent solution for those who have already made the decision to walk away from their property but are worried about being left responsible for a mortgage shortfall.