What Is Bankruptcy?
For those individuals who don’t have sufficient disposable income to offer an IVA, or debts too large for a Debt Relief Order, bankruptcy is often the final option available to deal with debt problems.
Bankruptcy writes off most debts, however any assets you own often need to be sold to repay your creditors.
In this guide, we’ll explain why you might consider bankruptcy, how the process works, and what alternative solutions are available.
Please note: Bankruptcy is a very serious decision. If you’re struggling financially, make sure you seek proper financial advice.
Contents
What Are the Advantages of Bankruptcy?
Bankruptcy offers immediate protection from your creditors. Most debts are included in bankruptcy (although there are some exceptions) and those creditors cannot pursue you once you are made bankrupt.
For individuals who don’t own their own home or have minimal assets/income, bankruptcy will usually end after 12 months and debts are written off.
What Is the Process of Bankruptcy?
Entering bankruptcy is a fairly quick and straightforward process. You apply online through the government’s website and are then declared bankrupt.
You’ll then meet with the Official Receiver, a government official who will oversee your bankruptcy and ensure you’re fully aware of its restrictions.
Your assets – such as your home and vehicle – will be seized and sold to help repay your creditors. After 12 months, any remaining debts are written off. The bankruptcy will remain on your credit score for 6 years.
You can learn more about the bankruptcy process by exploring the tabs below.
When dealing with large amounts of debt, it’s easy to jump to conclusions regarding your situation.
However, there are many ways to deal with debt, and hastily rushing into the wrong decision can be a very costly mistake – to ensure you find the right solution for you, make sure you consult an insolvency practitioner.
If it’s decided that bankruptcy is right for you, you’ll need to collate evidence of your financial situation and submit an online application.
The application costs £680 to complete. You can pay upfront or in monthly instalments.
Make sure all of the information you’ve included is correct. If you hide details or make false claims, you could face criminal charges, leading to fines or imprisonment.
Once you submit your application, it will be sent to an adjudicator, who will have 28 days to confirm or deny your bankruptcy.
In the large majority of cases, you’ll be accepted – in fact, less than 1% of applications are rejected. You might be declined if somebody else has already issued a bankruptcy petition against you or if the decision doesn’t appear to be sensible.
Once your form has been accepted, your adjudicator will issue a bankruptcy order, which will place you into bankruptcy with immediate effect.
It may take a few days before your assets are seized, but your bank and Building Society accounts will likely be frozen immediately.
You’ll meet with the Official Receiver within 2 weeks of your bankruptcy order being issued. This “meeting” doesn’t have to be face-to-face and is usually conducted over the phone.
They’ll be responsible for liquidating your assets and passing on revenue to your creditors. You must cooperate fully with the Official Receiver and be completely upfront about your situation. If you mislead them – or refuse to cooperate – there could be criminal consequences.
You’ll be discharged from your bankruptcy after 1 year.
Once you’ve been discharged, all remaining debts will be written off, and any restrictions will be lifted.
Which Debts Can Be Included in Bankruptcy?
Bankruptcy acts as a big reset for your finances – this means most debts can be included:
- Overdrafts
- Utility arrears
- Payday loans
- Personal loans
- Tax arrears
- Benefit overpayments
These are just some of the most common types of debts covered by bankruptcy. Out of all possible debt types, only a handful cannot be included in bankruptcy.
Which Debts Cannot Be Included in Bankruptcy?
A select range of debts are not covered by bankruptcy. This means that you’ll have to keep paying them even after you’re discharged.
- Student loans
- Court fines
- Child maintenance arrears
- TV Licence arrears
- Fraudulent benefit and tax overpayments
- Family or divorce case costs
Generally speaking, these restrictions are in place to prevent bankruptcy from being exploited as a means to avoid paying punitive court costs.
What Are the Restrictions of Bankruptcy?
When you declare bankruptcy, you spend 12 months as an “active bankrupt”. During this time, you’re subject to a set of restrictions. They’re designed to protect the business community from risky borrowing and ensure you’re able to commit to a fresh start.
While you’re bankrupt, you can’t:
- Borrow more than £500 (without telling the lender you’re bankrupt)
- Have a bank account with an overdraft or credit
- Act as a company director
- Be involved in the creation, management, or promotion of a company
- Act as a charity trustee
You’ll also need to ensure that you inform the Official Receiver of any changes to your financial situation.
Failing to abide by the restrictions – or failing to declare income – can result in you receiving a Bankruptcy Restrictions Order (BRO). This extends the period you have to follow restrictions by 2-15 years. It also places additional restrictions on you.
What Are the Alternatives to Bankruptcy?
If you feel bankruptcy isn’t right for you, don’t worry—there are a few other insolvency procedures you can consider.
These solutions are ideal if you have valuable assets you’d like to keep or if you’d prefer to deal with your debts in a more informal fashion.
Remember, bankruptcy is a very serious decision, and you should always consider all of your options with the help of an expert before rushing into anything.
An Individual Voluntary Arrangement is an alternative to traditional bankruptcy, which allows you to deal with your debts without surrendering your assets. You can also continue to act as a company director.
The solution stretches out debt payments over 5-6 years. At the end of this period, any remaining debt can be written off.
A Debt Relief Order operates in a very similar manner to bankruptcy.
The solution is designed for those with limited disposable income and assets who cannot afford to declare bankruptcy.
12 months after entering into a DRO, your debts are written off.
A Debt Management Plan is a good option if you don’t have a lot of debt and you feel that an insolvency solution might be a bit drastic for your situation.
This is where you reach an informal agreement with your creditors; you offer to make certain repayments, and they agree not to pursue legal action.
Be careful, though—the plan isn’t legally binding, and your creditors can change their minds at any time.
Speak to an Expert
If you’re struggling with debt, it’s important to get advice fast – early action prevents interest rates and charges from spiralling out of control, keeping your options open.
Our expert insolvency practitioners can assess your situation and guide you to the solution that is best suited to you. You may find that another solution, such as an IVA, is more appropriate for your needs.
Get in touch today to book a free, no-obligation consultation.
FAQs
How Much Does it Cost to Apply for Bankruptcy?
The total fee for a bankruptcy application is £680.
Will I Lose My Home When I Declare Bankruptcy?
The outcome of what will happen to your home varies depending on your situation.
Generally speaking, if you rent your property, you probably won’t be affected. The Official Receiver must allow you to keep enough money to afford your rent payments. They won’t tell your landlord about your bankruptcy either (unless you’re in arrears on your rent).
If you own your home, the Official Receiver will probably want to sell it to benefit your creditors. However, this doesn’t apply to every case.
Can I Keep My Vehicle in Bankruptcy?
This depends on your situation.
If you can show it’s essential for you to work or to provide care for a dependent, you’ll probably be allowed to keep it.
However, if you own a luxury vehicle, you’ll need to exchange it for a modest one.
What Happens to My Belongings When I Declare Bankruptcy?
You won’t have to surrender all of your belongings.
Your household goods, like your furniture, clothes, and cooking equipment, will remain yours.
The Official Receiver will only sell particularly expensive items like jewellery or antiques.
How Will Bankruptcy Affect My Credit Score?
Whilst you’re formally discharged from bankruptcy after 12 months, the fact that you were bankrupt will remain on your credit file for 6 years.
This will make it hard for you to get loans in the future. If lenders do give you a loan, they’ll likely apply a high-interest rate as you’ll be deemed a high-risk lender.
Sometimes your bankruptcy may extend beyond this six-year period due to a Bankruptcy Restrictions Order. If this happens, the bankruptcy will remain on your credit file until the BRO has concluded.
Who Will Know About My Bankruptcy?
Anyone who checks your credit score can find out about your bankruptcy. This will mainly be viewed by lenders but could also be viewed by landlords and employers too.
The bankruptcy will also be publicly advertised in The Gazette and listed for twelve months on the Individual Insolvency Register.
