What does bankruptcy mean?
Bankruptcy is an insolvency process for those who are unable to pay off their debts. At the end of the bankruptcy process, which usually lasts one year, the remaining debt is then cleared, giving you a fresh start.
Whilst this insolvency solution carries a certain stigma, bankruptcy is a good solution for many people and one which is worth considering carefully if you are struggling with debt. If you’re in this situation yourself, it is well worth looking at the pros and cons of bankruptcy and whether this would work for you.
How does bankruptcy work?
Bankruptcy works by sharing an individual’s assets between those who need to be repaid (the creditors). Bankruptcy normally lasts one year, after which time the bankruptcy ends and you are discharged. There are certain restrictions which last longer than this and your home could be sold up to three years after the bankruptcy begins.
When a bankruptcy order is granted, the individual’s debts will be written off in exchange for non-essential assets, such as property, possessions and excess income. The process of distributing those assets is managed by a trustee who will be appointed by the court and is in charge of the bankruptcy throughout.
If you are made bankrupt, then you must hand over all of your assets to your trustee. These include physical assets and access to your bank account, bank cards, credit cards and cheque books.
Certain assets cannot be taken away for you and the trustee must make sure that you have enough money to pay essential living costs for you and your family. If you are made bankrupt, you are allowed to keep anything which you need to make a living in your possession such as vehicles and tools, as well as everyday necessities such as furniture, bedding and clothing and any assets held in your partner’s sole name. It is possible that some of these items may need to be sold if they are worth more than a reasonable replacement, but that is unlikely.
If you own your own home, you should take independent advice about whether your home may be sold as part of the bankruptcy. You should be particularly careful if your home is in joint names as your partner’s share of any equity could be at risk. As a general rule, your home may be sold if it holds enough equity in your name to make a significant contribution towards paying off your debts.
If your home is considered as part of the bankruptcy, the trustee has three years to put this up for sale. After that time, this cannot be taken from you.
Once you are declared bankrupt, details of your bankruptcy will then be published in the Insolvency Register, which is a public record that anyone can view. There are also certain restrictions you must abide by whilst you are still bankrupt. For example, you cannot:
- Apply for credit of over £500 without declaring your bankruptcy status to the lender
- Start, promote or manage a company without seeking the court’s permission
- Act as a company director without the court’s permission
- Work in certain professions such as an Insolvency Practice or charity trust.
These restrictions normally end once you are discharged. However, the court may choose to extend them should you deliberately break any of the restrictions outlined to you.
Why do people declare bankruptcy?
Bankruptcy is a solution for those who simply cannot afford to pay back their debts. You can apply for bankruptcy directly if you are unable to make repayments to your creditors, and there is very little a creditor can do to block a bankruptcy application.
Bankruptcy is suitable for some more than others. For example, if your possessions are not worth much, or you own few high value assets and are not a homeowner, this debt solution may be more appealing as you have less to be taken away from you.
However, Bankruptcy is not always a voluntary process. Creditors may apply to make you bankrupt if you owe them £5,000 or more, and if you are not making payments towards your agreement. An Insolvency practitioner may also petition for your bankruptcy if you have broken the terms of an Individual Voluntary Arrangement (IVA).
What debts are written off in bankruptcy?
Once you are discharged from Bankruptcy, usually after 1 year, all of your unsecured debts are written off, subject to a few exceptions. This is unlike an IVA where only the debts included in that arrangement are written off.
Most unsecured debt can be included in bankruptcy and will be written off at the end of the process. These include:
- Credit card debts
- Unsecured personal loans
- PayDay or short term loans
- Utility arrears
- Council tax arrears
- CCJ debts
- Catalogue and store card debts
However, not all types of debt are covered by bankruptcy and these will need to be paid once you are discharged. Examples of debts exempt from bankruptcy include:
- Secured loans
- Student loans
- Maintenance fees such as child support and fees relating to family proceedings
- Magistrate court fines
Before you file for bankruptcy, you should identify any debts that are not applicable and make a plan for how these will be paid once you are discharged.
How many different types of bankruptcies are there?
There are two types of bankruptcy in the UK – voluntary and involuntary. The difference is to do with how you are made bankrupt. However, once the bankruptcy is ‘live’, the process is the same regardless of whether the process is voluntary or involuntary.
Bankruptcy can be a voluntary process where the individual applies to be made bankrupt or involuntary by request of the creditors or an insolvency practitioner.
If you apply for bankruptcy then you will need to pay a fee to the court to make that application; if your creditors apply to make you bankrupt then they will pay that fee. In the UK, only individuals can be declared bankrupt.
The current bankruptcy fee is £680.
In Scotland, bankruptcy is called ‘sequestration’ and follows a different set of rules. Read more about sequestration here.
What are the pros and cons of declaring bankruptcy?
As with any debt or insolvency solution, bankruptcy is not the right solution for everyone. It is important to do lots of research and weigh up the pros and cons of bankruptcy.
Advantages of bankruptcy
- Bankruptcy can give you a fresh start and a debt free future
- Any outstanding debts are usually written off after one year
- It removes the stress of contact from creditors. They cannot continue to chase you for money when you are bankrupt
- Once you declare bankruptcy, bailiffs and debt collectors are unable to take action against you
- Bankruptcy is usually completed within just one year. Many alternatives take much longer
- You will always be left with enough income to reasonably live on while you are in the bankruptcy process
- Your partner’s assets and their portion of equity in your home is usually protected
Disadvantages of bankruptcy
- Your name will appear on the insolvency register, making filing for bankruptcy public knowledge
- The process of declaring bankruptcy can be stressful. You will need to complete paperwork and cooperate fully with your trustee. Your finances will be scrutinised, which can feel like an invasion of privacy
- If you apply for bankruptcy, you will need to pay an application fee to the court, this is currently £680.
- Bankruptcy will have a severe impact on your credit file and it will become difficult to obtain credit in the future. Bankruptcy will remain on your credit file for 6 years
- You must give up most of your assets and income over the period that you are bankrupt
- Your trustee may also be granted an attachment to earnings order for up to three years.
- Should you come into any money during the bankruptcy, you must give this up. For example, inheritance and lottery winnings
- If you own your home, this will be at risk of being possessed and sold as will any other assets of significant value
Bankruptcy can have a significant and long lasting impact on your future. Whilst the attraction of having a clean start free from debt is obviously appealing, you may lose all of your assets, including your family home. It is important to understand the pros and cons before entering deciding on any insolvency solution. You should always get independent professional advice on how these will impact you before making the decision that bankruptcy is right for you.