Welcome to our Bankruptcy Series – the first of many series to come. Here you can read our guide to everything you need to know about bankruptcy but were too afraid to ask. So be sure to join us so you do not miss any post in this series.
If you’re in debt and can’t afford to pay it off, it can be scary and stressful. The first thing you need to do is relax. There are a number of options available to you and plenty of support to help you get back on your feet.
You may have heard that bankruptcy is one way to sort out your finances. There are pros and cons to bankruptcy and it is not a step that should be taken without considering all your options because it can have serious, long term consequences.
In this series, we cover everything you need to know about bankruptcy so you can make an informed decision about whether it’s right for you.
What is Bankruptcy?
Put simply, bankruptcy is a legal status involving a person or business that cannot repay their debts. Usually, the debtor files for bankruptcy, but if you owe more than £5000 a creditor can apply to make you bankrupt.
Once you’ve been made bankrupt, your assets are detailed and valued and may be used towards repaying your debt.
There are restrictions on your financial behaviour while you’re bankrupt, but once the bankruptcy has been discharged, these restrictions are usually removed, with any outstanding debt written off.
Bankruptcy gives you a chance to start again without the burden of debt while offering creditors the opportunity to recoup some of what they’re owed.
The procedures surrounding bankruptcy vary slightly in the UK, but this article only covers the process for England. If in doubt, check with your local Citizen’s Advice Bureau for details of any differences in Wales, Scotland and Northern Ireland.
The Advantages of Filing for Bankruptcy
Although the prospect of going bankrupt might sound scary, there are a number of benefits.
- When the bankruptcy order is over, you’re free to start again after as little as twelve months, with your debts written off in most circumstances.
- You don’t have to deal with your creditors any more – this falls to the official receivers.
- You’re allowed to keep certain items, such as your household goods, and you’ll also keep a reasonable amount of money to live on.
- If you rent your home, unless your lease specifically prohibits bankrupts, you won’t be forced to move, although you may find renting a different property difficult.
- Furthermore, if you’re facing court action, this may well be stopped if you’ve declared bankruptcy.
In short, bankruptcy could remove a lot of stress from your life.
The Disadvantages of Filing for Bankruptcy
If you just read the advantages of filing for bankruptcy benefits section and loved what you saw, wait a minute before you go skipping off to start the process.
Bankruptcy isn’t for anyone and it comes with its fair share of downsides.
- For a start, it’s not free. It costs £680 to start the process, money you may not have if you’re massively in debt.
- If you’re classed as having a high enough income, you’ll be expected to pay money towards your debts for 3 years – so don’t think you’ll be automatically debt free in 12 months.
- You’ll find it difficult, although not necessarily impossible, to get credit while you’re bankrupt and after it’s discharged, your credit rating will be negatively impacted for a further 6 years, affecting your chances of getting a mortgage, running a business or applying for other credit.
- If you’re a homeowner, you may be forced to sell your home, although your local authority might be able to help rehouse you. Not only that, you may have to sell other possessions, such as your car and luxury items.
- If you’re old enough to have access to your pension savings, these could be taken from you and if you work in certain professions, such as law, accountancy and banking, you might lose your job.
- If you own a business, it could be closed down and its assets sold.
- Bankruptcy also affects your immigration status. If you want to apply for British citizenship or bring over dependents, it’s highly likely your application will fail if you’re a bankrupt.
- Finally, your bankruptcy status will become public knowledge, whether you like it or not. The only exception to this is if you have good reason to believe that you or your family could be the victims of violence if it’s known that you’re bankrupt.
It’s a lot to consider.
Is Bankruptcy Right For Me?
Now that you know about the downsides, you might be wondering why anyone would want to declare bankruptcy. Well, it might be the best course of action for you if:
- You can’t see how you can pay off your debts
- You own little of value and have little or no equity in your home
- There’s little chance of your situation improving
- You live or have a business based in England or Wales either currently or during the past three years and now live in another European state (except for Denmark).
If you can say yes to all of the above, but believe that bankruptcy is only for people owing tens of thousands of pounds, don’t worry.
There’s no minimum level of debt required for you declare bankruptcy.
As long as your unsecured debt (credit and store cards, personal loans, etc.) is greater than the value of your assets, you might want to consider bankruptcy.
What Other Options Should I Consider Before Filing Bankruptcy?
There are certain circumstances when bankruptcy isn’t the best option, such as if:
- Your debt is less than £20,000 and your assets are less than £1,000 in total (excepting a vehicle worth less than £1,000 and basic household items.)
- You would lose your job if you declared bankruptcy, e.g. solicitor, accountant or estate agent
- You want to keep your debt problems private
- There is a good chance of your circumstances changing soon, e.g. through inheritance or a PPI claim
Before making a final decision, seek expert advice, e.g. from the Citizens Advice Bureau.
What Are the Alternatives to Filing Bankruptcy?
If you decide against bankruptcy, you do have a few alternatives. These include:
- If you owe less than £20,000, have under £50 a month available to pay your creditors and your assets total under £1,000, excepting household goods and a vehicle worth less than £1,000, you can apply for a debt relief order to help pay off your debts.
- If you can spare at least £100 towards your debts every month, you might prefer to come to an individual voluntary arrangement to pay off your debts over a fixed period.
- If you have unsecured debts of less than £5,000 and have a county court judgement against you, an administration order could be a better option.
Debts Not Included in Bankruptcy
Although most debts will be written off at the end of your bankruptcy period, not all debts are included and if you owe certain types of debts, you’ll still need to decide how you’re going to pay them off. These include:
- Magistrates court fines
- Payments ordered under a confiscation order
- Maintenance and child support payments, although you may be able to ask the court to order that you don’t have to pay this debt
- Student loans
- Secured debts
- Debts owed due to personal injury or death, although you may be able to ask the court to order that you don’t have to pay these
- Social fund loans
- Certain benefits and tax credit overpayments
- Debts obtained fraudulently, although your creditor cannot chase you for payment while you’re bankrupt
- If you owe debt jointly with someone else, you can include the debt in your bankruptcy, but this would leave the other person liable for the full amount unless they also apply for bankruptcy.
What happens to my Mortgage if I go Bankrupt?
Declaring yourself bankrupt does not absolve you from the possibility of repossession if you’ve fallen behind on your mortgage.
However, if your home is repossessed and sold for less than you owe in secured loans, the outstanding debt is no longer secured and will be written off at the end of your bankruptcy. This is also the case if your home is sold after your bankruptcy has ended.
So you’ve decided to declare bankruptcy. Now what? Be sure to join us so you do not miss any post in this series.
Over to You
Have you been declared bankrupt? Have you been bankrupt in the past? We’d love to hear your experiences, so leave a comment and tell us your story.