What is Bankruptcy?
Bankruptcy is a legally binding debt solution, which is usually considered to be a last resort if you are unable to pay back your debts in a reasonable amount of time. Here are some key facts about bankruptcy:
- Bankruptcy is a formal insolvency procedure for people living in England, Wales, and Northern Ireland
- If you live in Scotland, Sequestration, which is considered to be equivalent, might be right for you
- You can apply for bankruptcy yourself, or one or more of your creditors can petition to make you bankrupt
- Applying for bankruptcy is relatively expensive – it incurs a £680 fee
- This application is made to the Insolvency Service – the body responsible for insolvencies in England and Wales
- In Northern Ireland, applications for bankruptcy are handled by the High Court
- Bankruptcy usually involves the sale of valuable assets you own, such as a car or house, to raise funds to pay back your creditors
- You may also have to pay a monthly contribution towards your debts for up to three years, if you have enough surplus income
- Bankruptcy itself usually lasts for one year, at the end of which any remaining debts are written off
- Your career might be affected whilst you go through bankruptcy – you will be unable to direct a company, for instance
- Bankruptcy includes all of your unsecured debts
- It can also include mortgages, but the property must be surrendered
- Once bankruptcy has been approved, your creditors will no longer be able to contact you, or take further legal action to recover your debts
Are you eligible for Bankruptcy?
Bankruptcy might be the right solution for one or more of the following reasons:
- Your unsecured debts are worth more than your assets
- You find yourself unable to pay back your debts in a reasonable amount of time
- You have little or no surplus income which could be put towards a monthly payment scheme, such as an IVA
- Your circumstances are unlikely to change in the near future
Bankruptcy can have a significant impact on your life, so deciding to begin the process is a big step. Essentially, bankruptcy is last resort, which allows people who are unable to repay their debts, and do not have much surplus income or many assets, to have a fresh start.
Bankruptcies involve the following steps:
- Get Advice
Bankruptcy may or may not be the best debt solution for you, so it is important to seek advice from an expert before you begin an application. If you decide that declaring bankruptcy is the right decision, ensure that you withdraw enough money to live on for the time being, as if your bankruptcy is approved, you bank account(s) will be frozen.
- Make your Application
You can apply for bankruptcy online, and fill out the application in your own time. You must also pay a fee – in England and Wales, this is £680, and in Northern Ireland it is £669. It is possible to pay this fee in instalments.
- Acceptance and Agreement of Terms
If your application for bankruptcy is accepted, your bank and/or building society accounts are immediately frozen, and your case is assigned an ‘official receiver’. This receiver decides, based on your circumstances, whether you need to make monthly payments towards your debts, and which of your assets should be sold. Once the bankruptcy comes into effect, control of your money and possessions is transferred to the receiver. Details of all bankruptcies are recorded on the public Insolvency Register.
- Cooperate with the Official Receiver
At the start of your bankruptcy, you will need to be interviewed by your official receiver – this can be done in person or over the phone. The receiver then becomes responsible for distributing profits from your savings, and the sale of any assets, between your creditors. Because the official receiver acts as mediator between you and your creditors, they will no longer be able to contact you. During your bankruptcy, you will also need to open a new bank account for wages and living expenses.
If you have cooperated with your official receiver, you will be discharged from your bankruptcy after 12 months. At this point your remaining debts are written off. It is recommended that you request a letter of discharge in case you need to prove this. If you have been making monthly contributions towards your debts, these may continue for up to two more years after your discharge. Bankruptcy negatively impacts your credit score, and will remain on your file for six years from the time it began. Once you have been discharged, you can begin to rebuild your credit score.
Bankruptcy can have a profound effect on your life, but it does allow you to be released from your debts in a relatively short space of time. There are also some other benefits:
- Once bankruptcy has been granted, creditors can no longer directly contact you, but must communicate through your official receiver
- They can take no legal action against you, removing one source of stress
- Bankruptcy allows you to write off your debt in a very short space of time – only 12 months if you cooperate with your official receiver. In an IVA, this would take five to six years
- You will be able to keep enough money to live on, as well as essential possessions
- If it is essential for work, and worth £1,000 or less, you will also be able to keep a vehicle
- You will be allowed to keep any items vital for your trade if you are self-employed
- If you own a home but have little equity in it, you may be also be allowed to keep this
Bankruptcy is by no means an easy route to take and, for many, it is a last resort. Here are some disadvantages of going bankrupt:
- A record of your bankruptcy will be added to your credit report. This will remain there for at least 6 years after your bankruptcy and it will affect your ability to get credit in the future as lenders use credit reports to decide if they are willing to give you credit
- Your home is likely to be sold if it has a lot of equity. Equity is the amount of profit you would make were you to sell your home
- Cars that cost over £1000 are also usually sold. Although, if a friend or relative steps in and pays the difference, then it is possible to keep the car
- A number of professions are affected by bankruptcy. You will be unable to work as a company director, or be involved with the management of a limited company while you are bankrupt. You can also no longer practice as a solicitor or accountant and in other financial services
- It costs £680 to go bankrupt and, understandably, most people who need to go bankrupt do not have that amount of money available. While it is possible to pay in instalments, this does not afford you as much of a fresh start as bankruptcy otherwise could be
- Bankruptcy can also affect a person’s application to become a British Citizen and their status as a ‘person of independent means’. While you have not been discharged, your application is likely to be turned down