Navigating the complexities of bankruptcy in the UK can be a daunting journey, filled with questions and uncertainties, especially concerning personal finances. A primary concern for many is, ‘If I go bankrupt what happens to my wages?’
In this comprehensive guide, we delve into the critical facets of bankruptcy, exploring how it affects debts, employment, credit, insurance, bank accounts, pensions, and personal assets.
Whether you’re considering bankruptcy or are in the midst of it, this article aims to shed light on these crucial areas, providing clarity and guidance through the intricacies of this challenging financial landscape.
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What is Bankruptcy?
Bankruptcy is a legal process made to help debtors get a fresh start financially where they won’t have to pay off all their debts, depending on their circumstances.
Once you’re declared bankrupt, you enter a legal process that comes with a set of restrictions. These restrictions are about:
- Borrowing money
- The name of a business you trade
- Managing or being a director of a company
- Doing certain jobs
Breaking the above restrictions goes against the law. Also, you may have to contribute or make payments towards your debts after the start of the bankruptcy.
In most situations, an individual applies to make themselves bankrupt. But in some cases, creditors/people you owe money to can go to court and make you bankrupt if you’re unable to pay your debts.
Pros and Cons of Bankruptcies
While bankruptcies come with a certain set of benefits, they also have a list of drawbacks. Let’s take a look at what these are:
- Waived debts: Once you go bankrupt, your debts will be reduced as you can get your defaulted unsecured debts written off.
- Protection against legal action: after securing a bankruptcy order, your insolvency is acknowledged formally. This provides a measure of protection against creditors who can no longer take any legal action against you in order to recover the amount you owe.
- No additional charges: once you declare bankruptcy, you won’t have to pay any additional penalties or fees. This indicates that your creditors cannot add further interest or charges.
- Asset liquidation: assets like your car or home might have to be liquidated and sold so that you can pay your creditors.
- Professional limitations: declaring bankruptcy might result in job-related implications. This is mainly because some employers don’t allow individuals who are bankrupt to work for them. So, make sure to check your employment contract before you enter any type of formal insolvency solution.
- Effect on credit file: declaring bankruptcy will have a negative impact on your credit file. It will be visible on your credit report for a period of six years.
- Public record: once you’re bankrupt, it will become a public record. It will be published in a public insolvency register.
Does Bankruptcy Clear All Debts?
No, even though it prevents you from having to pay most debt, it doesn’t clear all types of debt. Declaring bankruptcy will stop you from having to pay off debts such as personal loans, credit card debt, and similar consumer debt. However, it will not clear debts such as:
After declaring bankruptcy, you are no longer the owner of your assets. However, the benefit of this is that creditors can no longer ask you to pay off your debts or take legal action against you.
The only time someone can reach out to you regarding debt is when you’re being chased for a payment to clear debts that aren’t included when going bankrupt. For example, Magistrate fines.
If I Go Bankrupt What Happens To My Wages?
When bankruptcy becomes a reality, understanding its implications on your income is essential. Let’s break it down.
Imagine your disposable income. What you have left after covering basic living expenses exceeds £20 each month. In such a scenario, you may be required to contribute towards your debts. This is where an Income Payments Agreement (IPA) comes into play.
An IPA isn’t a one-size-fits-all solution; it’s tailored to your unique financial situation. The aim? To strike a balance between fulfilling your debt obligations and maintaining a reasonable standard of living.
The calculations for an IPA are done with precision, ensuring that while you contribute towards your debts, your essential needs, like food and housing, aren’t compromised. This is done in order to ensure that debts don’t completely overshadow your daily life.
Your disposable income is calculated by subtracting your living expenses from your income. But if you receive benefits with no employment, you won’t have to pay it. If you refuse, you may receive an IPO (Income Payments Order) from the court.
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How Does Bankruptcy Affect Your Job and Future Credit?
For most people, their job remains unaffected by bankruptcy. This means you can continue your professional life without the shadow of bankruptcy looming over you. However, there’s a catch.
Certain professions, particularly in the financial sector, might see a different impact. If you’re working in finance, insolvency, or related fields, bankruptcy could indeed affect your career trajectory. This brings us to another crucial point: the effect of bankruptcy on your future credit.
Bankruptcy leaves a mark on your credit report for six years.
During these years, your ability to borrow money, whether for a personal loan or a mortgage, will be substantially impacted. Even after these six years, the impact of bankruptcy will be present, as creditors often inquire about past bankruptcies.
Can I Get Insurance After Bankruptcy?
The post-bankruptcy landscape can be tricky, especially when it comes to insurance. You might find yourself in a situation where your existing insurance policies are abruptly cancelled. This isn’t just inconvenient; it’s a potential risk to your financial stability.
But there’s more to consider. When you start looking for new insurance policies, be prepared for a change in the playing field. Insurers, now viewing you as a higher risk due to your bankruptcy, may hike up the premiums. This means shelling out more for the same level of coverage.
The moment bankruptcy is declared, your bank account is typically frozen, and access to your funds becomes restricted. Also, make sure not to make new bank accounts until after you are declared bankrupt. The OR will have it closed or frozen if you do.
However, certain options remain open. Basic bank accounts, with their limited features, are an option. These accounts might not offer the full suite of services, but they provide a crucial lifeline – a means to manage your wages and make essential purchases.
What Happens to My Pension If I Go Bankrupt?
The good news is that pensions are generally safeguarded during bankruptcy. The rules are designed to protect most pension funds from being seized as assets in the bankruptcy process. This means that, for many, their pension remains a beacon of hope, a secure resource for the future.
Also, you might notice that your OR lowers your monthly pension contributions to the minimum amount until the end of your bankruptcy. If you have other investments and savings, your OR will take these even if you saved them for your retirement.
Can I Keep My Car If I Go Bankrupt?
The decision to retain your car post-bankruptcy hinges on its necessity. If it’s deemed essential for your livelihood or due to a disability, you might be able to keep it. However, if it’s considered non-essential, brace yourself for the possibility of having to give it up.
This assessment is based on alternatives available to you, such as public transportation or affordable taxi services.
Also, keep in mind to cancel your road tax and insurance if you have to give up your vehicle. In a case where you’re paying for a vehicle on a monthly hire purchase agreement, the company will take it back as per the contract. You will not get back any of the money you paid previously.
Take a look at this forum discussion where a user states they are concerned about losing their car and the response provided by another user:
The Official Receiver does have the authority to sell your property to settle debts. However, it’s not a straightforward decision. There are exceptions, particularly if your home shelters family members or dependents.
The decision to sell your home is not made in isolation; it takes into account various factors, including the needs of those living with you. The process varies greatly based on individual circumstances and the specifics of your case.
Furthermore, the OR has three years to sell your home starting from the date of the bankruptcy. If the OR doesn’t sell it within this time period, it will not be sold, and you will be able to keep it.
In a case where you believe you own the house again as three years have passed, get some advice from a professional. Also, note that you cannot give it away or sell it for less than what it was valued for beforehand. If you do this, it would be a bankruptcy offence.
Will I Get Kicked Out of My Rental Property?
In most cases, declaring bankruptcy doesn’t automatically result in eviction from your rental property. This comes as a sigh of relief for many, as the stability of a home is crucial during such turbulent times.
However, it’s important to be aware of the exceptions. Certain rental agreements may have clauses that specifically prohibit tenants who are declared bankrupt. Additionally, if there are ongoing legal proceedings against you for rent arrears, bankruptcy might complicate your situation further.
When Are You Discharged from Bankruptcy?
Typically, the discharge from bankruptcy occurs 12 months after your declaration. This one-year period marks a significant transition in your financial status. However, it’s not set in stone. There are circumstances where this period can be extended with the help of a Bankruptcy Restriction Order (BRO).
Factors such as your compliance with bankruptcy procedures and any additional complications that arise during the bankruptcy process can influence this timeline.
Additional Advice and Guidance
If you’re struggling with debt and don’t believe bankruptcy is the best option for you, note that there are various debt solutions you can consider. We recommend you explore alternative debt solutions that can address your debt-related concerns effectively.
However, it’s crucial to keep in mind that each of these debt solutions has specific eligibility criteria. Selecting the right one can lead to debt resolution while choosing the wrong one could worsen your financial circumstances.
Hence, seeking guidance from a professional debt advisor is a prudent step to take if you find it challenging to determine the most suitable debt solution on your own.
- Additionally, you may be eligible for Minimal Asset Process bankruptcy (MAP). For that to work, you need to prove that you have only a limited income and few valuable assets.
- This MAP option is known for its speed, cost-effectiveness, and simplified process, making it a practical choice to explore.
If you need personalised assistance based on your current financial situation, please feel free to complete our online form by clicking here to receive help from our Money Advisor Team.
Key Points
- Not all debts are cleared through bankruptcy. Obligations like magistrate court fines and child maintenance debts remain.
- Declaring bankruptcy means losing control over your assets, but specific debts still require payment.
- If disposable income exceeds £20 monthly, contributions toward debts may be required under an Income Payments Agreement.
- Bankruptcy can impact certain professions, especially in finance, and affects credit reports for six years, influencing future loan opportunities.
- Obtaining insurance can be more difficult and expensive after bankruptcy due to the perceived increased risk.
- Bank accounts are typically frozen during bankruptcy, but basic accounts may be available for managing essential finances.
- Most pension funds are protected during bankruptcy, though there can be exceptions based on individual circumstances.
- Keeping a car after bankruptcy depends on its necessity for livelihood or disability, with alternatives like public transport being considered.
- Bankruptcy doesn’t automatically lead to losing a rented home unless the rental agreement prohibits bankrupt tenants or there are rent arrears legal proceedings.
- Discharge from bankruptcy typically occurs 12 months after declaration, but this period can extend depending on various factors related to the individual’s bankruptcy case.
FAQs
A bankruptcy will remain in your credit file for a long time. But this doesn’t mean your credit history will not improve after you’ve gone through those financial setbacks. Sometimes, you might even notice our credit scores recover after the bankruptcy is discharged.
Getting credit after bankruptcy will be difficult. But if you work hard, you can improve your credit soon, which will enable you to borrow once again without any hassle.
