What is Bankruptcy?

 

Bankruptcy is a formal personal insolvency process that is used to address serious debt concerns.

 

Almost all types of debt can be dealt with and you can become debt-free after just one year.

 

In England & Wales you’ll pay a substantial application fee and may have to make monthly payments for three years towards your debt.

 

Your assets could be used to help repay your debts and to cover your bankruptcy’s administration costs.

 

Bankruptcy is often the quickest and least expensive way to resolve a debt problem. However, this debt solution may also result in significant negative consequences, so it’s important to obtain expert debt advice before submitting your application.

 

Our expert advisers are available to provide you with debt advice.

 

Bankruptcy (with some key differences) is also available if you live in Northern Ireland or Scotland.

Bankruptcy Qualification Criteria

 

You must live in England or Wales (or manage a business that’s located here). Alternatively, you can apply if you left England or Wales within the past three years and now live outside of the European Union (with the exception of Denmark).

 

There is no minimum level or maximum level of debt to qualify.

 

You must be able to raise £680 to pay the application fee. Instalment payments are possible but your application cannot proceed until the full amount has been paid.

 

Your bankruptcy application must prove to the Adjudicator (a government official) that you cannot afford to repay your debts when they’re due and/or that your assets are insufficient to repay your debts. This status is known as “technical insolvency”.

 

All applications are submitted online but external support is available for those who lack the means or capacity to apply electronically.

 

Benefits of Bankruptcy

 

Some potential advantages associated with bankruptcy include:

 

• Your trustee deals with your creditors for you

• You’re protected from creditor legal action

• Your unsecured debts will be written off

• No monthly payment if you cannot afford it

• Includes most types of debt

• Doesn’t require creditor support

 

Drawbacks of Bankruptcy

 

Some potential disadvantages of bankruptcy include:

 

• Risk of losing assets like your home or car

• Personal information added to a public register

Credit rating negatively affected

• Some types of employment affected

• Restrictions on further credit use

• Living on a limited budget for three years

• Expensive application fee (£680)

• Loss of windfalls (e.g. inheritance)

 

Debts Included in Bankruptcy

 

Almost all types of unsecured debts are automatically included. They include:

 

Credit cards

• Bank overdrafts (including joint overdrafts)

• Bank loans

High cost loans (like Everyday Loans or 118 118 Money)

Credit union debts

• Guarantor loans (like Amigo, UK Credit, and George Banco)

• Payday loans

• Store cards

• Catalogue accounts

• Debt purchasers

Debt collection agencies (collecting debt for other lenders)

• Council tax arrears

• HMRC

• Non-fraudulent tax credit or benefit overpayments

• Mortgage shortfall debts

Money owed to family and friends

• Unpaid bills (like medical or legal costs)

• Utility arrears (like gas, electricity, and water)

• Business debts (for sole traders)

Bounce Back Loan

 

Remember that your bankruptcy will only deal with your personal liability for a debt. Other connected parties will remain liable for repayment. Examples include:

 

• A joint borrower (on a joint loan or joint overdraft)

• A loan guarantor (for guarantor loans)

 

Debts Excluded from Bankruptcy

 

You must continue to directly pay for the following types of debt because your bankruptcy will not discharge your liability, or because you’d lose essential goods or services.

 

• Mortgages secured against your home

• Rent arrears

• Finance secured on goods (like a car)

• Student loans

• Charging orders

• Magistrate court fines

• Criminal fines

• TV licence

• Child maintenance arrears

• Court ordered confiscation orders

• Social fund loans

• Debts incurred after your bankruptcy order

• Personal injury compensation orders

• Court ordered payments in respect of family proceedings

 

While bankrupt you’ll be protected from any debt related to fraud, but following your discharge your creditors can attempt to enforce payment again.

 

While rent arrears are an included debt, your landlord retains the ability to attempt to evict you from your home. You should try to agree an arrears repayment plan with your landlord that will protect you from eviction.

 

The Bankruptcy Process

 

Always obtain professional advice before submitting a bankruptcy application. You can obtain expert advice from any FCA authorised debt counsellor or from an Insolvency Practitioner.

 

Following the submission of your application, the Adjudicator has up to 28 days to review your application. Their job is to make the formal bankruptcy order for successful applicants.

 

You become officially bankrupt once this order has been made and your personal details get added to the public insolvency register.

 

You can now expect to hear from the Official Receiver who is employed to take control of your property (if necessary) and to assess whether you’re able to make a monthly payment towards your debts.

 

The Official Receiver may transfer responsibility for managing your bankruptcy to a different bankruptcy trustee. You are obliged to cooperate with the Official Receiver and any other appointed bankruptcy trustee.

 

You will usually be discharged from bankruptcy after 12 months. Discharge results in your debt being written-off and your bankruptcy restrictions coming to an end.

 

If it has been assessed that you can make a monthly payment, this payment will continue for a further two years (three years in total).

 

Homeowners

 

If there’s equity in your home, your property is at risk of being sold by your bankruptcy trustee.

 

Owning a home jointly will not prevent the sale of a property. The joint owner would receive their share of the equity following a sale.

 

Having children living in your home will not prevent the sale of a property, though your trustee may allow more time to enable you to find a new home to live in.

 

A third party (often a relative) can buy out your share of the equity. For example, if your trustee calculated you had £10,000 of equity, a third party could pay this money to the trustee to avoid the sale of the property.

 

Vehicle Owners

 

If you own a vehicle worth a significant sum of money your trustee may require that it is sold. A third party could pay money to your trustee to cover the vehicle’s value and therefore avoid a sale.

 

If you own a vehicle without any reasonable need to keep it your trustee may require that it is sold. This might apply if you have access to functional public transport links instead.

 

If you own a vehicle of modest value, and have a reasonable need to use it, you’ll usually be able to keep the vehicle.

 

You do not own a vehicle if it’s on secured finance like hire purchase or a conditional sale agreement. Some secured finance providers will recover a vehicle from you if you become bankrupt. Others will allow you to keep the vehicle provided you keep paying the finance.

 

Effect on Employment

 

Bankruptcy does not affect most people’s employment. There are two important checks that you should make before submitting an application.

 

Firstly, you should review your employment contract (and handbook if you have one) for clauses related to bankruptcy, insolvency, or making arrangements with creditors.

 

Secondly, you may wish to consult about bankruptcy acceptability with your trade union, HR department, line manager, or your professional regulatory body.

 

People working in business may face particular challenges, especially the self-employed and company directors.

 

You cannot serve as a company director while bankrupt, but you can continue working for your company. If you own shares in your company the trustee might consider them to be an asset.

 

If you’re self-employed and you employ other people, lease business premises, or rely upon trade credit, your business could face very serious disruption after becoming bankrupt. You should however be allowed to keep the tools of your trade.

 

Many professional regulatory bodies subject their members to conduct or insolvency rules. For example, we provide additional information relevant to those working in the legal profession and financial services. Similar standards and restrictions apply to other professionals like accountants and architects.

 

Disciplined types of work often impose disclosure obligations on their staff. This applies for example if you work in the police, prison service, or armed forces.

 

Switching Bank Account

 

Your bank is likely to freeze your bank account when your bankruptcy order is made.

 

You’ll almost certainly need to open a new bank account before applying for bankruptcy. The new account should be opened with a bank you owe no money.

 

You’ll be limited to basic bank accounts without credit facilities, but they do still tend to provide online banking, mobile apps, and debit cards.

 

Your Pension

 

Unlike other assets, savings held in an approved pension scheme are usually safe from your bankruptcy trustee.

 

If you withdraw funds from your pension (especially a lump sum) the money will no longer be safe. Your trustee will treat this as income and likely require you to pay it over

 

Windfalls & Other Lump Sums

 

If you receive (or become entitled to) a windfall your trustee will require you to pay it over.

 

The most common example is an inheritance. If you receive property rather than cash it may have to be sold.

 

Other Household Assets

 

Your trustee will not remove and sell normal household goods from your home.

 

Any non-essential possessions of significant value might be at risk. This could include valuable jewellery or artwork for example.

 

Joint Bankruptcy

 

Joint bankruptcy applications do not exist.

 

Individuals must submit their own bankruptcy applications and each pay the £680 application fee.

 

Bankruptcy Restriction Orders and Undertakings

 

The Official Receiver will examine your financial conduct to understand why you became insolvent.

 

If they decide that your conduct was especially blameworthy or dishonest you may face additional consequences. Common examples include:

 

• Borrowing money knowing you couldn’t repay it

• Repaying family or friends at the expense of others

• Neglect of your business affairs and duties

• Refusing to cooperate with your trustee

• Fraud

• Significant gambling losses

• Giving away assets

• Selling assets for less than they were worth

 

If the Official Receiver believes your conduct was particularly dishonest or blameworthy, they could seek to impose a Bankruptcy Restriction Order (BRO) or a Bankruptcy Restriction Undertaking (BRU).

 

These orders or undertakings could extend your bankruptcy restrictions for up to 15 years.

 

The detail regarding any BRO or BRU is published (including personal identifying information) on the Insolvency Service register.

 

Being Made Bankrupt by a Creditor

 

Creditors can petition the Court for your bankruptcy if you owe them £5,000 or more.

 

This is a costly process, so most creditors only use it as a final step in a debt collection process.

 

Alternative Debt Solutions

 

IVA

 

An IVA (individual voluntary arrangement) is a well-known alternative to bankruptcy.

 

A key advantage of an IVA is that there is more flexibility to avoid the sale of assets like your home or your vehicle. It’s also likely to cause fewer problems if you operate a business.

 

This debt solution will only be available if you can afford to make financial contributions and your creditors consent to the arrangement.

 

Any regular IVA contribution usually lasts for at least five years, compared to three years for bankruptcy, so it could cost you more overall and keep you in debt for longer.

 

Debt Relief Order

 

If you qualify for a Debt Relief Order (DRO) it’s likely to be a better option than bankruptcy.

 

The application fee is just £90 and you’ll make no further payment.

 

You cannot be a homeowner, your total debt cannot exceed £20,000, and your assessed disposable income must be less than £50 per month.

 

Debt Management Plan

 

A debt management plan (DMP) is a less formal process and is not personal insolvency.

 

You will not be subject to formal restrictions and your personal details aren’t added to a public register.

 

Because it isn’t personal insolvency, assets such as your home or vehicle aren’t taken into account. It’s also less likely that your employment will be affected.

 

A debt management plan doesn’t encompass any debt write-off, so the process may last longer than personal insolvency types of debt solution.

 

Debt Consolidation

 

Debt consolidation involves obtaining a new loan to repay your other debts.

 

This may be effective if your new repayment is affordable and you do not build up new debts afterwards.

 

Consolidating debt can be risky, especially if you secure the new loan against your home.

 

Bankruptcy Debt Management Advice

 

If you’re considering debt solutions such as bankruptcy, please contact us.

 

Our experienced and qualified advisers will assess your financial situation and advise you about your debt solution options.

 

We’ve delivered our friendly and confidential debt advice service since 2007.

 

 

Author: Andrew Graveson

Qualified Debt Adviser & Bright Oak’s Founder

 

Page Last Updated: 22/06/2020

 

 

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