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Declaring Bankruptcy
Bankruptcy may be the right solution for you if you have debt problems. Declaring bankruptcy will allow you to waive or write off the debts that have become unmanageable for you. This page will outline the solution for you.
What is Bankruptcy?
Bankruptcy is the most known form of insolvency. Bankruptcy helps you deal with debts you cannot afford to pay off within a reasonable period. It is a legal process through which you can write off the debts you have been unable to pay and may involve selling off certain assets (your belongings and property).
An average bankruptcy lasts 1 year but it can last longer, depending on your circumstances. You may be required to make payments into your Bankruptcy for up to three years.
You can only declare Bankruptcy if you are living in England, Wales and Northern Ireland. Those residing in Scotland can apply for sequestration, which is the Scottish equivalent of Bankruptcy.
Declaring Bankruptcy: How Does it Work?
Bankruptcy is a formal procedure whereby you declare that you are unable to reasonably pay your current unsecured debts. You can either voluntarily declare Bankruptcy yourself or you can be made bankrupt. The latter process is known as Involuntary Bankruptcy. Involuntary Bankruptcy is usually initiated by creditors to whom you owe money and they feel there are no other means of recouping this.
Once you have become Bankrupt, you will be under no obligation to respond to your creditors. People you owe money to will not be able to take court action against you and neither will you be required to respond to their phone calls or letters.
Management of any correspondence will be taken over by the Official Receiver of the Appointed Representative.
After the Bankruptcy (usually 1 year) ends, all your existing debts will be written off so you can start afresh. Declaring Bankruptcy is a legal procedure; however, it no longer involves going to court.
If you are based in England, Wales and Northern Ireland, you can apply for Bankruptcy online. However, if you live in Northern Ireland, you can apply through the High Court.
Debts that can be included in a Bankruptcy
- Credit Cards
- Utility Arrears
- Store Cards
- Overdrafts
- Catalogue
- Benefit Overpayments (If not fraudulent)
Debts that are excluded from Bankruptcy
- Child Maintenance Arrears (if set by CSA or Child Maintenance Service)
- Criminal Fines
- Debts you obtain after the date of your bankruptcy order
- Debts are taken out fraudulently (e-g benefits fraud)
- Mortgages (if you want to keep the house)
- Social Fund Loans
- Student Loans
- TV Licence Arrears
- Court Orders telling you to pay compensation for someone’s injury
- Payments ordered by the court as part of family proceedings (e-g in divorce cases)
What Happens After Declaring Bankruptcy?
After you fill out your application and apply for Bankruptcy, an official adjudicator will determine whether to declare you Bankrupt or not. You will be informed of their decision within 28 business days.
If your application has been approved, you will be assigned an Official Receiver. This usually happens within two weeks of receiving your Bankruptcy Order.
The Official Receiver will review your information and evaluate your:
- Salary
- Assets
- Outgoing expenses
This assessment is undertaken to determine how your salary and assets can be used to pay back the money you owe. During this timeframe, your Official Receiver may also request an interview with you to develop a better understanding of your financial circumstances and draft an actionable payment plan.
After you have been appointed an Official Receiver, you will not be responsible for communication with your creditors. To recover the money you owe them, your creditors will be required to file a formal claim for the amount owed.
With an Official Receiver serving as the intermediary, you cannot make direct payments to your creditors, and neither can they demand direct payments from you.
You will also have to follow ‘Bankruptcy Restrictions’ until your Bankruptcy term elapses and you are discharged. These restrictions are mostly related to taking out more credit. For instance, if you apply for credit of £500 or more, you will have to inform your lender of your Bankruptcy.
Taking out credit while having an active Bankruptcy order is both expensive and difficult. Having a Bankruptcy on your record will affect your credit rating for six years.
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Bankruptcy Pros and Cons
Advantages
Waived Debts
Going Bankrupt will reduce your debt load since all the unsecured loans you have defaulted on can usually be written off.
Protection Against Legal Action
Once you secure a Bankruptcy order, your insolvency is formally acknowledged. This offers a measure of protection against creditors since they can no longer take any legal action against you to recover the money you owe.
No Additional Charges
Declaring Bankruptcy will also stop any additional fees and penalties. This means that your creditors cannot apply further charges and interest payments on you.
Reduced Pressure
After you declare Bankruptcy, you will not have to maintain contact with your creditors, and you will stop hearing from them.
Disadvantages
Asset Liquidation
Assets such as your home or car might have to be liquidated and sold off in order to pay your creditors.
Professional Limitations
Declaring Bankruptcy may have job-related implications too, especially if you are employed in the legal or financial professions. Some employers do not allow Bankrupt individuals to continue working for them. You should always check your employment contract before entering any formal insolvency solution.
Impacts Credit File
Having a Bankruptcy on your credit file will negatively affect it. Your bankrupt status would show on the credit file for a period of 6 years.
Public Record
Bankruptcy status becomes a matter of public record. Your Bankruptcy will be published in a public insolvency register.
Is Bankruptcy Suitable for Me?
Here are a few questions to consider before you make up your mind:
- Debt Level – Does your total debt exceed the value of all your possessions?
- Time – Have you not been able to repay your existing debts in a reasonable time frame?
- Consistency – Are you certain your circumstances are unlikely to change any time soon?
Bankruptcy should be considered when you are unable to repay your debts within a reasonable time and you have considered the impact on your personal assets.
Declaring bankruptcy may not be the best course of action for you if you can afford to repay your debt in the agreed timeframe or if the total worth of your assets is more than your total debt.
Homeowners who apply for bankruptcy run the risk of their homes being sold if there is enough equity in them. Tenants who have fallen into rent arrears also run the risk of being legally evicted by their landlords.
It is always important to seek advice when considering any debt solution.
Can I Apply for Joint Bankruptcy?
You can apply for joint Bankruptcy only if you have a business partner with whom you have taken out debts.
However, joint bankruptcy is not an option for couples. Even if you and your spouse took out a debt that is jointly owned, you will need to apply for bankruptcy individually.
In the case of joint debts where both you and your partner are named on the credit agreement, and one of you goes bankrupt, the other person is fully responsible for paying the total debt on their own.
How Much Does It Cost to Go Bankrupt?
Bankruptcy fees vary nominally depending on where you reside.
In England, Wales and Northern Ireland, you need to pay a total of £680.
If you live in Northern Ireland, this differs slightly, you need to pay a total of £683.
Regardless of where you live, you will need to pay Bankruptcy fees before you submit your application. If you cannot afford to pay the fees in a lump sum, you may be able to pay them in instalments. Contact the insolvency enquiry line for more information about this.
How to Apply for Bankruptcy?
- Submit Your Application
To declare Bankruptcy, you need to fill out an online application form available on the government website. You will have to provide details of your total debt, your disposable income, and your expense. If you have been approached by debt collectors or bailiffs, you will need to attach copies of any letters you have received from them.
To submit your application, you need to pay a fee of £680 in England, Wales and Northern Ireland and £683 if you are in Northern Ireland.
- Acceptance and Agreement of Terms
Once your application for bankruptcy is approved, your bank accounts and/or building society accounts will be immediately frozen and an official receiver will be appointed to your case.
Your money and any assets that can be sold to pay back debts will be transferred to your official receiver. They will also be responsible for corresponding with your creditors from this point on.
The details of your insolvency will be included on the insolvency register.
Coordinate with Your Official Receiver
At the beginning of your bankruptcy, your official receiver may want to interview you. You can do this in person or speak to them over the phone.
The receiver serves as a mediator between you and your creditors, so you must engage with them throughout the Bankruptcy process. They are responsible for distributing your payments or any returns from the sale of your possessions to your creditors.
Since your existing bank account would be frozen by this time, you will have to open a new bank account for your salaries and living expenses.
- Discharge
If you cooperate with your Official Receiver, you will be discharged from your bankruptcy after 12 months. Once this time period passes, all of your remaining debts will be written off.
If you have been paying your debts every month, you may have to continue making payments for two more years after your discharge.
What Happens at The End of The Bankruptcy?
Your Official Receiver will inform you after a year has passed and your Bankruptcy has ended.
It is worth noting that even after your Bankruptcy has ended, you could have a Bankruptcy Restriction Order issued against you – such an order can affect your financial decisions for up to 15 years.
This order can be issued for a range of reasons, including non-cooperation with your Official Receiver, and taking out more debts that cannot be repaid.
The record of Bankruptcy will remain on the Bankruptcy register a further three months after you have been discharged – or longer if you have been issued a Bankruptcy Restriction Order.
To find out more about managing your money and getting free advice, visit Money Helper, independent service set up to help people manage their money.
Frequently Asked Questions
Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.
Can I get credit after bankruptcy?
Taking out more debt after you have declared bankruptcy is possible but not advisable. During your bankruptcy term, you cannot borrow more than £500 without disclosing your bankruptcy to the lender. If you are borrowing less than that, you may be able to obtain credit.
Once you are discharged from your bankruptcy, you might find it difficult to take out credit for six more years. Some lenders might let you borrow but at a higher interest rate.
How long will bankruptcy stay on my credit report?
Your bankruptcy will end after a year but it will stay on your credit report for six years after you have been discharged. After this duration, your details will be removed.
Can I be made bankrupt by my creditors?
Yes, if you have borrowed £5000 or more and you break your credit agreement, you can be made bankrupt by your creditors. You will be issued a notification when this happens.
What is the bankruptcy register?
The bankruptcy register is a part of the Individual Insolvency Register, a public register that holds information about different types of insolvencies like bankruptcies, IVAs and DROs.
Can bankruptcy be denied?
Will my bankruptcy be public knowledge?
Will my bankruptcy be public knowledge?
Details of your bankruptcy will be recorded in the individual insolvency register which is a public register.
Will declaring bankruptcy affect my job?
It is highly unlikely that bankruptcy will affect your existing employment but there are exceptions to this rule e-g if you work in the financial industry. You should check you employment contract if you have any concerns.
If you are a business owner, you will need to surrender your business to the trustee, so you will not be able to continue trading with it. You can, however, start a new business but it will be difficult to get credit to help you.
Will going bankrupt write off all my debts?
Most debts are included in your bankruptcy. When you are discharged from your bankruptcy, these debts are written off. However, some debts like child maintenance arrears and court fines are excluded from bankruptcy.
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