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Use a DRO when in negative equity?

Borrowing | Mortgage Helpful? 2

Asked by paclsimpson, submitted 14 July 2011.

Open Quote Regarding DRO's, my mother-in-law has a mortgage and may be in negative equity. She has unsecured debts totalling £23,000 and is currently paying a token payment back each month to each of them. If her debts were to fall below £15,000 is this debt then wiped off after 12 months?

I knew nothing of the existence of DRO's until I read your article!
End Quote

Answered by Justin on 14 July 2011

One of the conditions to qualify for a DRO is having assets of £300 or less. While the £300 generally excludes household furniture, it would include your mother-in-law's home - even if she has negative equity.

The DRO qualification test looks at 'gross' assets, i.e. the value of items you own ignoring any debts secured on them. So even though her mortgage might be greater than the value of her home, it's the actual house value rather than value net of the mortgage that will be used - obviously more than £300.

if she can afford to repay at least £200 per month then an individual voluntary agreement might be an option. The debt is usually reduced by 40-60% and repaid over 5 years, but this must be carried out via a private company who'll charge fees of around £7,500 in total - hardly a cheap option. Plus missing payments could lead to bankruptcy.

Bankruptcy is the last resort, as this would very likely mean your mother-in-law losing her home. It can also be quite expensive and she'd probably struggle to borrow any money for 6 years afterwards.

So I'm afraid there is no simple solution that I'm aware of. I'd encourage her to speak to her local Citizens Advice Bureau, if she hasn't already. The key thing short term is to stop lenders adding more interest to the money owed, else she'll probably never escape the debts. At best she might be able to negotiate a freeze in interest and reduction in the debts if she can commit to regular repayments. After all, lenders would usually rather get something back than nothing at all.

I hope she manages to sort things out.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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