Declaring bankruptcy can be a daunting prospect, and it often feels like a last resort when you’re overwhelmed by debt. But what happens when you declare bankruptcy in the UK? Understanding the process can make it a bit less scary and help you know what to expect.
In this article, we’ll walk you through the steps of declaring bankruptcy, from the initial application to what happens to your assets and your credit rating. Let’s dive in and take a closer look at what bankruptcy really means in the UK.
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What Happens When You Declare Bankruptcy: Understanding The Basics
Bankruptcy is a debt solution for people who can’t afford to pay their debtors as the value of their assets is less than the debt. This allows you to clear your debts and start fresh, but you must consider bankruptcy after trying all the other solutions available.
When you declare bankruptcy, you state that you cannot pay the outstanding debts and pass the responsibility of making repayments to a trustee who is an insolvency practitioner or an official receiver.
The trustee might sell or downgrade your assets to repay the outstanding debts. For example, suppose you own a big house with excessive value, your trustee might ask you to downgrade it and use the extra to pay off the debts.
Below is a detailed breakdown of the consequences of declaring bankruptcy.
- Financial Investigation
Once you declare bankruptcy, the Official Receiver will investigate your finances. This includes your income, expenses, and any assets you own. This thorough examination ensures that all debts are accounted for and that any remaining assets are used appropriately.
- Income Payments Agreement
If you have disposable income, you might need to sign an IPA, agreeing to make monthly payments for up to three years. The IPA considers your essential expenses and ensures you can manage the payments without undue hardship.
- Asset Management
Your assets, such as your home or car, might be sold to pay off your creditors. Could this mean losing essential belongings? Only non-essential, high-value assets are sold. Items necessary for daily living, like clothing and furniture, are typically exempt.
- Bank Accounts
Your bank accounts may be frozen for 2-7 days as the Official Receiver reviews your finances. It’s advisable to have some cash on hand to cover essential expenses during this period.
- Public Record
Your bankruptcy will be listed publicly in the Insolvency Register and the London Gazette. While this may seem daunting, it’s a standard part of the process and ensures all parties are informed.
How would you declare bankruptcy? What are the standard steps? Keep reading to find out.
How To Declare Bankruptcy: The Step-By-Step Process
Below are some ways to apply for bankruptcy:
- You can apply by yourself.
- Your creditors can apply if you owe them more than £5000.
- If you fail to make payments for your Individual Voluntary Agreement (IVA) the insolvency practitioner can apply for bankruptcy.
It doesn’t matter who applies for bankruptcy the process is the same. Let’s discuss the steps to declare bankruptcy in detail.
The first step of applying for bankruptcy is the application. If you’re an England or Wales resident, you can apply online. If you’re living in Northern Ireland, you can pick up the application form and apply through a court.
You must pay an upfront fee of £680 for the application. This can be paid in instalments or there are grants to help you pay this fee.
In case, your creditor or the insolvency practitioner applies for bankruptcy, you’ll receive a copy of the petition. You can request the court not to proceed with the bankruptcy, but you have to provide a guarantee that you’ll pay your debts.
After applying for bankruptcy, a trustee or an official receiver will be appointed to investigate your financial situation. They’ll discuss your income, expenses, and assets and decide how you can contribute to the debts.
You must cooperate with the trustee to do this properly. They have 28 days to assess your application and ask for any additional information.
They can also take control of your assets and sell them to pay off your debts and to cover the cost of the administration process.
Note: Things that you need to live a comfortable life such as kitchen goods, furniture, clothing, work equipment, etc. are not considered assets.
After bankruptcy is approved, you don’t have to deal with your creditors anymore and they can’t take legal actions against you. A trustee or an official receiver will be appointed to take control of your finances.
If you have leftover income each month and can afford regular monthly payments, the trustee may apply for an Income Payment Agreement. As per the IPA, you must make a payment towards your bankruptcy each month for up to three years.
The amount you pay will depend on your income, and the minimum monthly payment amount is usually around £20. The monthly expenses include utility bills, TV licenses, food, rent, broadband, child maintenance, and prescriptions. IPA does not apply to people receiving state benefits.
Note: When you submit a bankruptcy application, your bank will freeze all your accounts for 2-7 days. This is for the trustee to investigate your finances.
If you need more guidance to become debt-free contact us.
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Three Types Of Bankruptcies UK
There are three major types of bankruptcies in the UK: chapter 7, chapter 11, and chapter 13. Let’s discuss them in detail.
- Chapter 7 bankruptcy
Chapter 7 bankruptcy also known as liquidation bankruptcy is the most common type of bankruptcy in the UK. This is available for both individuals and businesses and involves selling off the assets to pay back the creditors.
You must pass a means test to be eligible for liquidation bankruptcy, where your income is evaluated. If it’s below a certain level you’ll be approved for Chapter 7 bankruptcy.
- Chapter 11 bankruptcy
Chapter 11 bankruptcy is mainly for businesses and this is a way to restructure your debt rather than liquidating your business.
Here you’ll be given a repayment plan to pay off your debts for several years while running the business. The monthly repayment amount and the repayment duration depend on your business’s financial situation.
- Chapter 13 bankruptcy
Chapter 13 bankruptcy is ideal for individuals who can have a regular income but need support to manage debts.
You’ll be given a repayment plan which mentions the monthly amount and for how many years to pay. This is almost similar to Chapter 11 bankruptcy, but here you must have a certain amount of debt to qualify and the repayment plan must be approved by the court and the creditor.
You must understand the terms and conditions of each type of bankruptcy to make the right decision. Another question you have is ‘how long does bankruptcy last?’ Read the next section for the answer.
How Long Does Bankruptcies Last UK?
Usually, bankruptcies last for 12 months in the UK and after 12 months your remaining debts will be forgiven. However, if you are under an Income Payment Agreement, you must continue paying it up to three years,
Within the 12 months, you’ll have certain restrictions and obligations including you can’t apply for credit over £500 without informing the lender about the bankruptcy or act as a company director without court approval.
After you’re discharged from bankruptcy the above restrictions will be lifted and you are not liable for the debts.
However, a question many people have is whether bankruptcy will affect your career or your ability to obtain loans after you’ve been discharged. Look at the below forum post.
Source: MoneySavingExpert
Bankruptcy will be shown in your credit report for 6 years making it difficult for you to obtain loans. After 6 years, it will be removed and you can start building up your credit score again.
If a lender asks you whether you were bankrupt when applying for a loan after 6 years, you must answer truthfully.
Extra Info: Bankruptcy usually doesn’t affect your rented property if you keep up with rent payments but you may lose your home if it’s considered an asset to be sold.
Is it the right decision to declare bankruptcy? What are the benefits and downsides of it? Continue reading.
Declaring Bankruptcy Pros And Cons UK
Like any other debt solution, bankruptcy has its pros and cons. Let’s see what they are.
- Provides you relief from debt when you have huge amounts of debt to pay off and have no funds for repayment.
- Creditors won’t chase you after declaring bankruptcy. Instead, they’ll communicate with your trustee. This frees you from stress.
- Lasts only for 12 months if there’s no Income Payments Agreement which is a short period.
- All remaining debts will be forgiven after 12 months.
- You are allowed to keep the essential items to fulfil your basic needs.
- You can start fresh with your finances.
- You are no longer in control of your assets after declaring bankruptcy. A trustee will be appointed who’ll take control of all your assets and decide how to manage them.
- You may have to sell or downgrade your house, vehicle, and other assets if they are considered non-essential.
- Can negatively affect your credit rating for 6 years.
- You won’t be able to obtain a credit of £500 or more without informing the lender.
- You can’t act as the director of the company without the court’s permission.
- Bankruptcy can affect your career if you’re in the financial sector or other professions such as police, armed forces, etc. You must check your contract before applying.
- Might affect your immigration status.
- If you have joint debts, your partner’s credit score will be affected.
- Notice of your bankruptcy will be published in the London Gazette and sometimes in your local newspaper.
- When you are bankrupt and for three months after your discharge, your name will be displayed on the Individual Insolvency Register which is a public database.
- If you have a stable income you must pay the debts for three years which is a long time.
- In case you are running a business, your business will be closed down, employees will be dismissed, and the business will be sold.
- The trustee has the right to investigate anyone who has information on your assets publicly at the court.
Overall, declaring bankruptcy offers a fresh start, free from overwhelming debt. However, it comes with significant consequences, including the potential loss of assets and a lasting impact on your credit score.
You must weigh the pros and cons carefully before declaring bankruptcy. How would you do it?
Is Bankruptcy The Right Solution For You?
Bankruptcy might be the ideal solution if,
- You don’t have any way to pay off your debts.
- Your financial situation will not improve shortly.
- You don’t own many assets and your debt is more than your assets’ value.
- You don’t have any plans like starting a business or a career which would be disrupted by bankruptcy.
Bankruptcy is not the right solution if,
- You have a minimum of £50 in disposable income each month.
- The value of your assets is higher than the value of your debt.
- You have debts in joint names.
- Affect your employment.
- You are not prepared for your credit rating to drop.
If you are unsure whether bankruptcy is the ideal solution to pay off your debts, consult a debt charity for free guidance. Below are some debt charities in the UK:
- Stepchange.
- Citizens Advice.
- National Debtline.
Alternatives For Bankruptcy
Below are some other debt solutions you can consider if bankruptcy is not suitable for your financial situation.
- Individual Voluntary Agreement (IVA): IVA is a formal agreement between you and your creditor to pay off all your debts over several years. You make monthly payments to the insolvency practitioner who’ll share it among your creditors. At the end of IVA, the outstanding debts will be forgiven.
- Debt Relief Order (DRO): DRO is a debt solution in which you can stop making payments for 12 months and after 12 months your debts are most likely to be forgiven. However, you must meet some strict eligibility criteria to qualify for a DRO.
- Debt Management Plan (DMP): DMP is an informal agreement between you and your creditor to pay your debts in regular monthly payments. You can negotiate this with the creditor yourself or appoint a DMP practitioner on your behalf for a small fee.
Are You Ready To Declare Bankruptcy?
Bankruptcy is a debt solution for those who can’t afford to pay off their debts. It gives a fresh start, but may significantly affect your credit score.
When you apply for bankruptcy, a trustee will be appointed to investigate your assets and financial situation. Your trustee has the right to sell or downgrade your assets to pay off the debts.
Usually, bankruptcy lasts for 12 months. After 12 months, any remaining debts will be forgiven, but if you have a stable monthly income, you’ll have to sign an IPA agreeing to make monthly repayments towards your debt for 3 years.
Within 12 months you are subjected to certain restrictions. Bankruptcy will remain on your credit report for 6 years and has benefits and downsides. You can opt for IVA, DMP, and DRO-like alternatives to pay the debts too. If you need further debt assistance fill out this online form and our debt advisor team will get back to you.
Key Points
- After declaring bankruptcy, the Official Receiver scrutinises your income, expenses, and assets to manage and potentially write off your debts.
- If you have disposable income, you may need to sign an IPA, agreeing to make monthly payments for up to three years.
- Significant assets, like your home or car, may be sold to repay creditors, but essential items for daily living are typically exempt.
- Your bank accounts may be frozen for 2-7 days while the Official Receiver reviews your finances.
- Your bankruptcy will be publicly listed in the Insolvency Register and the London Gazette.
- Bankruptcy remains on your credit report for six years, affecting your ability to obtain credit during this period.
- After 12 months, you are discharged from most debts, allowing you to start rebuilding your financial life.
- Bankruptcy usually does not affect your rented property if you maintain rent payments, but check for specific clauses in your tenancy agreement.
- Your home may be sold to release equity for debt repayment, but there are situations where you might retain it, such as through a partner or relative purchasing your share.
FAQs
An Individual Voluntary Arrangement (IVA) is a formal agreement with your creditors to pay back a portion of your debts over a specified period, typically five years. Unlike bankruptcy, an IVA allows you to retain more control over your assets and avoid the sale of significant assets like your home. However, an IVA requires approval from your creditors and adherence to a strict repayment plan.
In the UK, student loans are typically not included in bankruptcy. This means that even if you declare bankruptcy, you will still be responsible for repaying your student loans. There are limited exceptions, but generally, student loans must be repaid regardless of your bankruptcy status.
Bankruptcy is a matter of public record, and while there is no requirement for your employer to be notified, they may find out through a credit check or if you hold a position that requires financial oversight or fiduciary responsibility. Certain professions may have specific rules regarding bankruptcy that could impact your employment.
Most pensions are protected in bankruptcy and cannot be used to pay off creditors. This includes state pensions and private pensions. However, if you withdraw a lump sum from your pension before declaring bankruptcy, this money may be considered an asset and used to repay your debts.
When one person in a joint debt declares bankruptcy, the other person remains liable for the full amount of the debt. This means creditors can pursue the non-bankrupt party for repayment. It is essential to consider how this will affect any joint financial arrangements and discuss options with the other party involved.
