If you are struggling with debt, you may be considering all options available to you. One of those options could be bankruptcy – and while for some it may be a turning point, for others it might not be the right fit.
It is a big financial step, so if it is something you are considering, it could help to seek expert advice from non-profit debt counselling services such as the StepChange debt charity and the Citizens Advice Bureau.
Here, we help to break down what bankruptcy is, how the process works and what happens once you’re on the other side of it.
What is bankruptcy?
Bankruptcy is a type of insolvency. With bankruptcy, all unsecured debts that you can prove you owe will be written off entirely. However, if you have any assets such as a house or a car, the value of these will be used to pay your creditors.
Being declared bankrupt is a legal status that is given to you if you cannot afford to repay your debts. You can only apply to be bankrupt, or be made bankrupt, if you owe more than £5,000.
Therefore, bankruptcy is not the right solution for everyone. If you have debts that are less than £5,000, your assets are worth more than your debt, or all your regular repayments are up to date and you can afford to keep paying them – then bankruptcy probably isn’t for you.
As an alternative, it may then be worth exploring other options such as a debt relief order (DRO) or an individual voluntary arrangement (IVA).
How does it work?
When you are declared bankrupt, the value of your possessions (house, car, leisure equipment, jewellery, etc.) is used to pay back the money you owe to creditors. You will be allowed to keep back certain things known as ‘exempt goods’. These are things such as everyday household items and tools that you need to do your job. Your bank accounts will also be frozen. Depending on your income, you’ll be asked to make payments towards your debts for up to three years.
The bankruptcy process lasts for 12 months, and then you will be ‘discharged’. This is when your debts covered by the bankruptcy are cleared.
You can be declared bankrupt in two ways:
- A creditor can ask a court to make you bankrupt in order to recoup the money that you owe them. This can be done without your consent as long as you owe them more than £5,000. Under the process, you would first receive a statutory demand, which is a letter from the creditor giving you 21 days to repay the debt or come to an agreement. Failure to repay the debt in this time would then result in bankruptcy.
- You can declare yourself bankrupt. This can be done by completing an online application through the gov.uk website in England and Wales. Doing so will cost you £680. The process is different if you live in Scotland or Northern Ireland.
Once you have been declared bankrupt, you’ll receive a copy of the bankruptcy order. As mentioned above, your assets will be used to pay your debts and you’ll have to follow some bankruptcy restrictions. These restrictions include not being able to borrow more than £500 without informing the lender you are bankrupt, and not being allowed to create or manage a company without the court’s permission.
As part of the process of being declared bankrupt, your name and details will also be published in the individual insolvency register (IIR). If you feel this would impact your safety, you can apply to stop your details being published.
What happens after bankruptcy?
Being declared bankrupt can be a stressful and emotional event. The practicalities of it mean that you could lose valuable possessions and your bank accounts may be closed. While bankruptcy only lasts for 12 months, the ramifications of such a big financial decision can continue to affect you long after you have been discharged.
Firstly, your credit rating will be affected for six years, so you may find it difficult to borrow any money for a significant period of time. If you do find a lender that will lend you money, it is likely to be at a higher interest rate as you will be classed as a high-risk customer. Even after your bankruptcy has been cleared from your profile, lenders can still ask if you have ever been bankrupt, which may affect their decision on whether or not to lend you money.
After bankruptcy, you may still not be completely debt free. There are still debts that bankruptcy doesn’t cover, such as magistrates court fines, student loan repayments and debts secured with a charging order. So while all debts that were covered by bankruptcy will have been cleared, you may have others you are still required to pay.
One key thing to consider doing once you are the other side of bankruptcy is keeping a close eye on your finances. You could try to improve your credit report by adding a short statement explaining why you got into debt. Then maybe you could consider something like a credit rebuilder credit card in order to start improving your credit rating.
