What is Bankruptcy?
Bankruptcy is a legally binding debt solution, designed to help people with unmanageable debts to write them off in a relatively short time-frame. Bankruptcy is usually considered to be a last resort, as the process puts your assets, including any property you own, at risk of being sold. However, it can be a useful way to get a fresh financial start. You can apply for bankruptcy yourself, or your creditors can apply to make you bankrupt.
During the bankruptcy process, you will be assigned an ‘official receiver’, who becomes responsible for all future communications with your creditors. They will take control of any assets or savings you may be in possession of, and decide how to best repay creditors, through the sale of non-essential items. You may also be required to make a monthly contribution towards your debts for up to three years, if your official receiver decides that your income is sufficient.
Bankruptcy is only available to individuals living in England, Wales, and Northern Ireland – if you live in Scotland, Sequestration is considered equivalent.
Who is Eligible for Bankruptcy?
Although there is no set minimum amount of debt required to be eligible for bankruptcy, your application is most likely to be successful if you meet the following criteria:
- The value of your assets is less than the value of your unsecured debts
- You are unable to pay back your debts in a reasonable amount of time
- You do not have sufficient disposable income to put towards a scheme such as an IVA or Trust Deed
- Your financial circumstances are not likely to improve in the near future
Most types of debt are written off by the process of bankruptcy. There are, however a few exceptions:
- Court fines
- Child support payment arrears
- Student loans
- Secured loans
- Social fund loans
- Benefits or tax credit overpayment (in some cases)
Mortgages are a more complex issue. The bankruptcy process does not prevent your property from being repossessed; however, if the value realised from its sale does not cover the outstanding amount on the mortgage, the remaining debt will be written off at the end of your bankruptcy.
The Bankruptcy Process
The process of bankruptcy usually follows these steps:
- Complete your Application for Bankruptcy
This can be done online at through the GOV.uk service. You will have to pay a fee of £680, but if you choose to pay online, this payment can be split into as many instalments as necessary.
- Withdraw Cash for Living Costs
If your application is successful, there may be a delay in transferring control of your bank accounts to your official receiver, and they may be frozen immediately in the meantime. Because of this, it is important to ensure you have enough money to cover your basic living costs for a few weeks.
- Talk to your Official Receiver
If your application is successful, you will be declared bankrupt and put in touch with your official receiver. Following this, you will have an initial interview with your receiver, which can be conducted either over the phone or face to face. During this interview, your receiver will work with you to decide which of your assets can be sold, and whether you are able to make a monthly repayment based on your circumstances. At this stage, details of your bankruptcy are recorded on the Insolvency Register.
- Cooperate and be Discharged
Assuming you cooperate with your official receiver, you will be discharged from your bankruptcy after 12 months. This means that any remaining unsecured debts you have will be written off. At this stage, it is a good idea to request a letter of discharge for your personal records, and to prove your discharge if need be. If your bankruptcy involved making monthly repayments on your debts, these could continue beyond your discharge date, but this will depend upon your individual circumstances. Details of your bankruptcy will be removed from the Insolvency Register three months after your discharge.
Going through bankruptcy is a significant decision, which should not be undertaken lightly. It is usually considered a last resort for people struggling to pay back their debts. However, there are a number of significant benefits associated with bankruptcy:
- You are no longer obliged to communicate directly with creditors. As soon as you are declared bankrupt they can no longer contact you, and must instead contact your official receiver. This means you will receive no more harassing phone calls and letters from creditors
- All of your unsecured debts are written off in a relatively short space of time – 12 months. This is a much shorter timescale than writing off debt with an IVA or Trust Deed, which can take up to six years
- Should you be required to make monthly payments, these will be affordable based on your income and expenditure
- You will be allowed to keep essential household items, and may be able to retain property if you have little equity in it
Bankruptcy does not come without drawbacks, however. Below are some of the main issues to bear in mind when considering filing for bankruptcy:
- Going through bankruptcy puts your assets, including property, at risk. You could lose some of your possessions and possibly some of your home
- Details of your insolvency will be recorded on the public Insolvency Register for the duration of your bankruptcy and three months afterwards
- Your bankruptcy will be recorded on your credit file for at least six years, making accessing credit in the future more difficult
- You will be unable to work in some professions during your bankruptcy – for example, you would not be permitted to be director of a company. It is best to check the terms of your employment before making a final decision
- The £680 fee associated with going bankrupt may be unaffordable if you find yourself with unmanageable debt
If you are worried about keeping your home, and think you would be able to make monthly repayments over a sustained period of time, bankruptcy might not be the solution for you. You might consider an IVA, or, if you live in Scotland, a Trust Deed or Debt Arrangement Scheme (DAS). You could also consider an informal solution such as a Debt Management Plan (DMP).