Often when people take out a mortgage, their bank asks them to obtain mortgage insurance. The cost of this insurance is often $10,000 or more. But the insurance doesn’t protect the borrower, it protects the bank. So, when a property is sold and there is a mortgage shortfall, the bank claims on the insurance policy and the insurer then chases the borrower for the mortgage shortfall debt.
We’ve previously written about how we have helped clients settle mortgage shortfall debts. But we’ve also helped a number of clients with mortgage shortfall debts which are being pursued by a mortgage insurer. This is an example of one of those cases where we settled a mortgage shortfall debt for less than 25% of the amount claimed.
Background – Our Client’s Debt to their Mortgage Insurer
We were engaged by clients after they had received a default notice pursuant to Section 88 of the National Credit Code (Default Notice). Their bank had previously sold their property and there was a mortgage shortfall of $365,000. They had taken out mortgage insurance, but the insurance was for the bank’s benefit and the mortgage insurer had paid the shortfall to the bank and was now chasing them for the debt.
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;
- Their bank had sold the properties as mortgagee in possession which resulted in the $365,000 mortgage shortfall (Debt);
- The Debt was assigned to a mortgage insurer which appointed a debt collection agency to collect the Debt;
- Our clients had 4 children, all of which were below the age of 16; and
- Our clients were living “paycheque to paycheque” and held no significant assets apart from two cars which had negative equity.
Options Available to Our Clients
Having reviewed our clients’ financial situation, we advised them that the options available to them were:
- Voluntarily file for bankruptcy, or to allow the mortgage insurer to make them bankrupt;
- Put forward a proposal for a Personal Insolvency Agreement pursuant to Part X of the Bankruptcy Act 1966 to avoid bankruptcy; or
- Negotiating a debt settlement for the mortgage shortfall debt with the mortgage insurer.
Successful Outcome – Settlement of Mortgage Shortfall Debt
We approached the debt collection agency who was acting on behalf of the mortgage insurer. We set out our clients situation in writing and then explained the circumstances to them on the phone.
Using our experience as bankruptcy Trustees, we convinced the mortgage insurer that settling the debt was financially better for them than making our clients bankrupt. And after substantial negotiations, the Insurer agreed to a reduced payment of $90,000 (being $45,000 for each of our clients) in satisfaction of the Debt. The mortgage insurer also agreed for the settlement amount to be paid by monthly instalments of $2,500 a month for 36 months.
This was obviously a good outcome for our clients. It was a 75% reduction in the Debt, allowed them to pay the settlement amount over time and resulted in them avoiding bankruptcy.
Contact us for Assistance
If you are struggling with debts we can help. This may include helping with settling debts which you or your business owe to creditors including the ATO, banks or mortgage insurers. So, don’t delay things any further and get in touch with us on 1300 906 966 or send us an email at firstname.lastname@example.org to arrange a free confidential initial discussion.