We have previously written about how you can avoid bankruptcy if your property is worth less than your mortgage by settling your mortgage shortfall debt. But what happens if you have mortgage ‘insurance’ and can you settle a debt to your mortgage insurer?
It is often a requirement that mortgage insurance be purchased when taking out a loan to purchase a property. A common misconception however, is that the insurance protects a purchaser should there be a mortgage shortfall when the property is sold.
In reality, the insurance is for the benefit of the financier. When a property is sold and there is a mortgage shortfall, the financier will claim on the insurance policy and the insurer will then pursue the shortfall.
We have assisted many clients in this situation. And below is another example of how we have helped settle a mortgage shortfall debt.
Background – Sale of Properties by Financier Resulting in Mortgage Shortfall
Our clients were unable to keep up with their mortgage payments which caused the sale of properties they owned by the bank as a mortgagee. The sale resulted in a mortgage shortfall debt, which was promptly paid out by the mortgage insurer.
When our clients engaged us, a default notice pursuant to Section 88 of the National Credit Code had been issued to them by the insurer. We had an initial meeting with the clients and established the following background information:
- They had defaulted on mortgage payments for two investment properties located in North Queensland;
- The sale of the properties by the mortgagee resulted in a $365,000 mortgage shortfall debt;
- A debt collection agency had been appointed to collect the debt on behalf of the insurer which paid out the mortgage shortfall;
- Our clients had four children, all of which were below the age of 16; and
- Our clients held no significant assets apart from two cars which were subject to finance.
Options Available to Our Client
After we considered our clients’ circumstances we advised them that their options were:
- Going bankrupt, or waiting for the mortgage insurer to make them bankrupts; or
- Negotiating a settlement with the mortgage insurer to avoid bankruptcy; or
- A proposal for a Personal Insolvency Agreement under Part X of the Bankruptcy Act 1966.
Successful Outcome – Settlement of the Mortgage Shortfall Debt
We approached the debt collection agency who was acting on behalf of the mortgage insurer. We set out our clients’ financial situation in writing, followed by a phone call to explain our clients’ circumstances to them.
Our experience as bankruptcy Trustees, meant that we were well placed to convince the mortgage insurer that settling the debt was far better for them financially than making our clients bankrupt. After substantial negotiations, the Insurer agreed to a reduced payment of $90,000 (being $45,000 for each of our clients) in full settlement of the mortgage shortfall debt. The settlement amount was to be paid by monthly instalments of $2,500 a month for 36 months.
Not only does the settlement amount represent a 75% reduction in the mortgage shortfall debt, our clients were also allowed to pay the settlement amount over time. This resulted in them avoiding bankruptcy.
Contact Us for Assistance
If you are faced with a mortgage shortfall debt and would like to explore all options that may be available to you, please call us on 07 3221 0055 or contact us for a free, no-obligation consultation.