What is Bankruptcy?

 

Bankruptcy is a legal process through which you can seek relief from your debts. This type of personal insolvency is typically used to tackle serious debt issues. Almost all types of debt are addressed and you can get discharged after one year.

 

In England & Wales you’ll pay a £680 application fee and (depending upon your financial situation) you might be required to make further monthly payments for three years. Certain types of assets that you own could be sold.

 

Bankruptcy may be the quickest and least expensive option to address a serious debt problem. However, it can also result in serious consequences depending upon your financial and personal circumstances.

 

This page covers bankruptcy in England and Wales. If you live in Scotland or Northern Ireland there are some important differences to the benefits, consequences, and costs of becoming bankrupt.

 

We recommend that you receive expert debt advice before submitting a bankruptcy application. An adviser will help you to fully understand the potential benefits and consequences that will affect you. For friendly confidential debt advice please contact us.

 

Benefits Summary

 

Some potential advantages of becoming bankrupt include:

 

• Does not require creditor approval

• Your trustee deals with your creditors

• Protection from creditor legal action

• Unsecured debts written off

• Monthly payment only if affordable

• Covers most types of debt

• Keep exempt goods (like regular household items)

 

Drawbacks Summary

 

Some potential disadvantages of bankruptcy include:

 

• Risk of losing assets (like your home or car)

• Personal details added to a public register

Credit rating seriously affected

• Affects some types of employment

• Restrictions against further credit use

• Living on a limited budget for three years

• Significant application fee (£680)

• Loss of windfalls (like inheritances)

 

Homes

 

If there’s equity in your home, your property is at risk of being sold by your bankruptcy trustee. Equity is calculated by subtracting your mortgage balance from your property’s estimated value.

 

Owning equity in a property does not automatically result in your home getting sold. A third party (often a relative) could purchase your equity by paying the money to your trustee. For example, if your trustee calculated you had £10,000 of equity, a third party could arrange to pay this sum to avoid the sale of your home.

 

Owning your home jointly does not prevent the sale of a property in bankruptcy. The joint owner would however receive their personal share of the equity released from a sale. Having children living in your home also not prevent the sale of a property, though your trustee may allow some extra time to help you to find a new home before selling.

 

Vehicles

 

If you own a vehicle of modest value you may be able to keep it. However, if your vehicle is worth substantially more than £1,000 it could be sold by the trustee.

 

Your bankruptcy trustee will assess whether you have a reasonable need to keep a vehicle. This reasonable need could be based upon factors like your commuting, work, or childcare requirements (and whether viable transport alternatives exist). If you do have a reasonable need to keep a car, but your vehicle is worth substantially more than £1,000, you may be granted a £1,000 allowance to purchase a replacement. Alternatively, a third party could purchase the vehicle’s equity from your trustee so that you can keep it.

 

You do not own your vehicle if it’s currently subject to secured finance (like hire purchase). Some secured finance providers recover vehicles from customers that have become bankrupt. Other vehicle finance providers allow customers to keep their vehicle if full payment is maintained. Your trustee may allow you to keep a financed vehicle if you reasonably need it and the monthly cost isn’t excessive.

 

Employment

 

Bankruptcy does not put most people’s employment at risk. There are however two important checks that you should make before proceeding.

 

Firstly, you should review your employment contract (and handbook if you have one) for any clauses related to bankruptcy, insolvency, or making arrangements with your creditors. Secondly, consider consulting about the acceptability of becoming bankrupt your trade union, HR department, line manager, and any professional regulatory body to which you belong.

 

People who run businesses may face particularly significant consequences, especially if you are self-employed or a company director. You cannot be a company director while you are an undischarged bankrupt (but you can continue working for the business). If you’re self-employed and you employ other people, lease business premises, or rely upon trade credit, your business could be severely disrupted by becoming bankrupt. You should however be allowed to keep the tools of your trade.

 

Some professional regulatory bodies impose financial conduct and insolvency rules upon their members and others that they regulate. For example, this may apply to those who work in the legal profession or financial services.

 

Employers in disciplined organisations often impose disclosure requirements upon their staff. This applies (for example) to those who are employed in the police, prison service, and the armed forces.

 

Switching Bank Account

 

Most people need to open a new bank account before applying for bankruptcy. The new account should be opened with a bank that you owe no money. You’ll be limited to basic bank accounts without credit facilities until you have been discharged. Most of these basic accounts do provide valuable features like contactless debit cards, online banking, and mobile banking apps.

 

Your bank is likely to freeze your bank account when the bankruptcy order is first made, but your trustee can intervene to rectify this.

 

Pensions

 

Unlike other types of assets, your trustee is highly unlikely to have any interest in savings held in an approved pension scheme. However, if you actually withdraw funds from your pension (in the form of a lump sum or an income) the money will no longer be protected. Your trustee will treat these funds as income and may require you to pay some or all of it to them.

 

Windfalls and Other Lump Sums

 

If you receive (or become entitled to) a significant windfall, your bankruptcy trustee will require you to hand it over. One common example of a windfall is an inheritance. If you receive property (rather than cash) your trustee may sell it.

 

Other Household Assets

 

Your trustee will not remove and sell normal household items, like your furniture or kitchen appliances for example. Tools of the trade needed for your job or business are also exempt.

 

Certain assets that aren’t necessary for your basic home needs or work might get sold. Examples include items like valuable antiques or caravans.

 

Bankruptcy Qualification Criteria

 

You must live in England or Wales (or manage a business that’s located there). Alternatively, you can apply if you left England or Wales to move abroad within the past three years.

 

There is no minimum or maximum level of debt.

 

You must be able to pay the £680 application fee. This fee can be paid in instalments but you cannot submit your bankruptcy application until the full sum is paid. Applications must be submitted online, but external support is available for those who lack the means or capacity to apply electronically.

 

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

 

Included Debts

 

Almost all types of unsecured debts are automatically covered including:

 

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 Loans

 

Your bankruptcy will only address your own personal liability for a debt. Other connected parties may continue to be liable for repayment. Examples include a joint borrower (for a joint loan or joint overdraft) or a loan guarantor (for guarantor loans)

 

Excluded Debts

 

You must continue to pay the following debts in full, either because your bankruptcy doesn’t discharge your liability, or because you’ll otherwise risk losing 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 temporarily shielded from any debt related to fraud, but after you have been discharged these creditors can enforce payment again.

 

Rent arrears are an included type of debt, but your landlord retains the right to attempt to evict you from your home if they aren’t repaid. It’s recommended that you agree an arrears repayment plan with your landlord to avoid the risk of eviction.

 

The Process

 

Get professional debt advice before submitting your application from an FCA authorised debt adviser or an Insolvency Practitioner. If you’re subject to stressful creditor contact, or legal debt enforcement action, you can use Breathing Space to provide sixty days of protection while you get debt advice and prepare your bankruptcy application.

 

After applying for bankruptcy, the Adjudicator has up to 28 days to review your application. If your application is successful the Adjudicator will make the formal bankruptcy order. You become officially bankrupt once this order has been made and your personal details are added to the public insolvency register.

 

You can now expect to hear from the Official Receiver. They are employed to take control of your assets (if applicable) and to assess whether you can afford to pay (from your income) towards your debts. If it’s assessed that you can afford a monthly payment, this payment will remain in place for three years.

 

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

 

You will usually be discharged from bankruptcy after one year. Discharge results in your debts being written-off and your bankruptcy restrictions ending.

 

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 become subject to additional restrictions. Common examples include:

 

• Borrowing money that you knew you could not repay

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 your assets

• Selling assets for less than they were worth

 

If the Official Receiver believes your conduct was particularly dishonest or blameworthy, they could 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 (including personally identifying information) regarding any BRO or BRU is published on the Insolvency Service register.

 

Joint Bankruptcy

 

Joint bankruptcy applications aren’t available in England and Wales. Individuals must each submit their own bankruptcy application and each pay the £680 application fee.

 

Being Made Bankrupt by a Creditor

 

A creditor can petition the Court for your bankruptcy if you owe them £5,000 or more. This can be a costly and time-consuming process for the creditor, often coming without any guarantee of making any financial recovery from you afterwards. Accordingly, petitioning for a borrower’s bankruptcy is generally commercially unattractive or an absolute last resort for consumer credit lenders.

 

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 is only available if you can afford regular financial contributions and your creditors consent to the arrangement going ahead. Your regular IVA contribution usually runs for five years or longer, compared to three years for bankruptcy, so this debt solution could cost you more overall and leave you in debt for longer.

 

Debt Relief Order

 

If you qualify for a Debt Relief Order (DRO) it’s likely to be a more suitable option than bankruptcy. The application fee is much cheaper (£90) and you’ll make no further payments afterwards.

 

To qualify for a DRO your total debt cannot exceed £30,000 and your assessed disposable income must be £75 per month or less. You cannot be a homeowner or own a vehicle worth more than £2,000.

 

Debt Management Plan

 

A debt management plan (DMP) is not a type of personal insolvency. You’re not 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.

 

You pay an affordable sum every month until your debts have been repaid in full. No debt gets written-off, so a DMP might run for an extended period of time.

 

Debt Consolidation

 

Debt consolidation involves obtaining one large 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.

 

Getting Debt Advice

 

If you’re considering debt solutions such as bankruptcy, please contact us. Our experienced and friendly advisers will assess your financial situation and confidentially advise you about your options.

 

 

Author: Andrew Graveson

Qualified Debt Adviser & Bright Oak’s Founder

 

Page Last Updated: 20/06/2021

 

 

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