Bankruptcy

Bankruptcy is a formal legal process in the UK where individuals who cannot repay unaffordable debts declare themselves insolvent. Their assets are used to repay creditors, and once discharged, remaining debts are usually written off, which can offer a financial fresh start.

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What is bankruptcy?

Bankruptcy is a formal, legally-binding procedure that provides a last resort for individuals who find they cannot pay their outstanding debts.

In the UK it’s only available to residents of England and Wales. In Scotland, a similar process known as Sequestration is used.

When someone declares bankruptcy, their financial affairs are placed under the control of the court, and a trustee or official receiver is appointed to oversee the process.

The primary aim of bankruptcy is to help individuals regain control of their finances when they owe more money than they can reasonably repay.

This process can provide a fresh financial start by either writing off or reducing the debts owed. However, it comes with significant legal and financial consequences, which is why it’s typically pursued when other debt solutions have been exhausted or are not suitable for the individual's circumstances.

What kind of debts can be included in bankruptcy?

Bankruptcy in the UK typically covers many forms of unsecured debt, or debts not secured against an asset like your home or car. These are also known as common debts. 

Debts that typically qualify for bankruptcy include:

  • Personal loans
  • Unpaid credit cards
  • Payday loans
  • Overdrafts
  • Utility bills

These debts are typically eligible for inclusion in the bankruptcy estate and can potentially be written off or partially repaid during the bankruptcy proceedings. 

It's important to note that some types of debts may not be included in bankruptcy and will generally remain the responsibility of the individual even after bankruptcy is declared.

What kind of debts can't be included in bankruptcy?

Certain types of debts cannot be included in bankruptcy, meaning you will be responsible for keeping up with payments even after you go bankrupt. 

Ineligible debts typically include:

Secured debts: Debts secured against an asset, like a mortgage or a car loan, are not typically included in bankruptcy. The individual must continue to make payments on these debts to keep their secured assets. Failure to do so can lead to the repossession of the property.

Student loans: Student loans provided by the government are usually not discharged in bankruptcy. These loans often have special terms and repayment arrangements that aren't affected by the bankruptcy process.

Child maintenance arrears: Any outstanding child maintenance payments cannot be discharged through bankruptcy. These financial obligations remain the responsibility of the individual.

Court fines: Fines, penalties, or other charging orders imposed by a court due to criminal or civil cases are generally not eligible to be included in bankruptcy.

It's important to consult with a qualified financial advisor or debt advisor to understand which specific debts can and cannot be included in your bankruptcy, as exceptions may apply in certain cases.

Who can initiate bankruptcy proceedings?

There are two main ways a person can be made bankrupt in the UK. We’ve outlined them below. 

Applying for bankruptcy yourself

When your financial situation becomes unsustainable and you owe more than you can repay, you have the option to be proactive and apply for bankruptcy yourself. 

By voluntarily lodging bankruptcy filings, typically through the Insolvency Service in England and Wales, you acknowledge that your debts have become unmanageable. This allows you to start the process of redressing your financial situation.

Receiving a bankruptcy petition from another party

If you owe money to creditors and fail to meet your obligations, creditors may be able to enforce bankruptcy on you by turning to the court and asking for what's known as a 'creditor's petition.' 

In cases like these, the creditor goes to court to request a bankruptcy order, which, if granted, initiates bankruptcy proceedings against you. It's important to respond to such petitions promptly and seek professional debt advice to explore solutions to bankruptcy when possible.

How to apply for bankruptcy

Bankruptcy is a significant step in your financial life, and the bankruptcy process involves several key steps to ensure it’s carried out correctly.

Seek professional debt advice

Before proceeding with bankruptcy, it's essential to consult with professional debt advisors. They can provide valuable insight and help you make sure bankruptcy is the most suitable solution for you before proceeding. 

In the UK, expert guidance is offered by debt charities like Step Change, debt advice companies, or Insolvency Practitioners.

Apply via the Insolvency Service

If you decide that bankruptcy is the right path, you'll need to formally apply for it through the Insolvency Service in England and Wales. 

This application process involves filling out forms detailing your financial situation, and paying the bankruptcy fees: £130 for your application, and £550 for your bankruptcy deposit. 

Cooperate with the official receiver

Once the bankruptcy proceedings begin, the official receiver, a government-appointed bankruptcy trustee, will take charge of your case. 

They will assess your financial situation, oversee the liquidation of your non-exempt assets, and ensure your creditors receive their fair share.

Bankruptcy discharge

After a set period, typically 12 months in the UK, you can receive a bankruptcy discharge. This means you are released from the outstanding debts included in the arrangement. 

It’s important to note that the bankruptcy will remain on your credit record for several years, affecting your credit rating. 

How much does it cost to go bankrupt in the UK?

Bankruptcy in the UK involves several costs and obligations. To initiate the process, there is a £130 application fee, and an additional £550 bankruptcy deposit is required. This deposit serves as a financial safeguard during the proceedings. 

Depending on your financial situation, you may also be subject to an Income Payment Agreement (IPA), requiring you to make regular payments from your income for a set period. 

The specifics of the IPA, including the duration and amount, are determined based on your financial circumstances.

What happens to my assets during a bankruptcy?

When you declare personal bankruptcy in the UK, your assets become part of the bankruptcy estate. This means they can be sold, and the money used to pay your creditors. 

Assets that might be taken into your bankruptcy arrangement include property, vehicles, savings, and valuable possessions, which may be sold to generate funds for repayment. 

Bankruptcy law does provide certain exemptions to protect essential items needed for daily living, such as basic household goods and a reasonable vehicle, up to a certain value.

It's important to work closely with a bankruptcy trustee or official receiver who will assess your financial situation, determine which assets can be used to repay debts, and ensure that any protected assets are not unfairly seized.

How long does the bankruptcy period last?

The duration of the bankruptcy period in the UK is typically 12 months. During this time, your financial affairs are placed under the control of an official receiver or a trustee, who will work to distribute your assets and manage the process. 

At the end of the 12-month period, if your financial situation hasn't improved and your eligible debts haven't been paid off, those remaining debts are usually discharged. This means you are no longer legally obligated to repay them. 

Details of your bankruptcy will remain on your credit report for six years, which will hurt your credit rating and affect your ability to access credit during that period.

What happens after the bankruptcy period ends?

While the bankruptcy process will typically end after 12 months, there are certain obligations which may last longer depending on your particular financial circumstances.

Income Payments Agreement (IPA)

If you have a surplus income during your bankruptcy, you may be required to enter into an Income Payments Agreement (IPA). This means you'll have to make regular payments from your income to your creditors for a specified period, usually up to a maximum of three years. The goal is to contribute to the repayment of your outstanding debts.

Income Payment Order (IPO)

Similar to an IPA, an Income Payment Order (IPO) can be issued by the court if you don't cooperate with an IPA or have significant surplus income. An IPO enforces regular payments from your income to your creditors.

Bankruptcy Restrictions Order

A Bankruptcy Restrictions Order may be imposed by the bankruptcy court in specific cases, like being found to have lied to the official receiver about the state of your finances. 

This extends the restrictions associated with bankruptcy. It can affect your ability to take on specific roles, such as being a company director or working within certain industries, without court approval.

A Bankruptcy Restrictions Order can last for up to 15 years, depending on the severity of your behaviour during the bankruptcy process.

Will it hurt my credit if I become bankrupt?

Bankruptcy significantly impacts your credit rating. When you enter bankruptcy, it is recorded on your credit report and remains there for six years. During this period, your credit rating will be negatively affected, making it challenging to access credit or other financial services.

Potential lenders may view you as a higher credit risk, which can affect your ability to secure loans, credit agreements, or even a basic bank account. Those credit options that are available might come with higher interest rates or stricter terms to reduce the risk to the lender.

However, after successfully completing bankruptcy, your credit rating should gradually improve once the six-year period has passed. This will allow you to gradually rebuild your financial standing.

Will people know I've been made bankrupt?

While bankruptcy is a matter of public record, it's not something that will generally be publicly advertised or widely known. That said, there are certain bodies and organisations that will have access to your financial history.

Credit reference agencies

Credit reference agencies are responsible for collecting and storing financial data, including information about bankruptcies. When you go bankrupt, the Insolvency Service registers this information, and it becomes part of your credit report.

Future lenders

When you apply for a loan, credit card, mortgage, or any form of credit or financial product, the lender will review your credit report. If they see a bankruptcy on your record, it raises concerns about your creditworthiness, making it more challenging to secure credit. 

While you can rebuild your credit after bankruptcy, it can take time before you're eligible for traditional credit options again.

Certain employers

In some industries and job roles, employers perform background checks on prospective employees, which may include a review of their credit history. 

This is particularly common in roles that involve handling finances, sensitive information, or significant trust, such as financial services, government positions, and roles with finance-related responsibilities.

Advantages and disadvantages of bankruptcy

Before filing for bankruptcy, it's crucial to weigh the advantages and disadvantages. We’ve listed some of the more important factors below. 

Advantages of a Bankruptcy

  • Bankruptcy legally eliminates qualifying debts, which can offer a financial clean slate
  • Creditor harassment and collection activities are paused during bankruptcy
  • Certain assets are safeguarded from seizure as part of the bankruptcy process
  • Bankruptcy follows a one-year timeline, ensuring a defined endpoint for the process
  • Bankruptcy won’t have any impact on your partner unless you have joint debts

Disadvantages of a Bankruptcy

  • Bankruptcy negatively impacts credit for six years, limiting access to financial services
  • Some assets and possessions may be sold to repay creditors during bankruptcy
  • Records of every UK bankruptcy are made available for public access
  • Bankruptcy restrictions affect financial activities and may limit employment opportunities
  • Certain bankruptcy obligations, like an Income Payment Agreement, can last beyond 12 months

Is it possible to apply for bankruptcy jointly?

In the UK, when business partners are facing financial difficulties and want to apply for corporate bankruptcy, they have the option to file for bankruptcy jointly.

Joint bankruptcy, often referred to as a ‘joint petition’ allows two or more business partners to combine their financial situations into a single bankruptcy case. This can be a practical solution when both parties share debts, assets, or financial responsibilities that they wish to address together.

Joint bankruptcy is only available to business partners, not couples. If you’re in a relationship and both you and your partner are interested in bankruptcy as a debt solution, you will each have to file a separate bankruptcy application and pay the respective fees.

Alternatives to bankruptcy in the UK

In the UK, several alternatives to bankruptcy are available for individuals facing financial difficulties. These alternatives provide various options for managing and resolving debt-related challenges.

Individual Voluntary Arrangement (IVA)

IVAs are formal agreements between you and your creditors to repay unsecured debts over a specific period, usually five to six years, via affordable monthly payments.

At the end of the IVA term, any remaining debt included is typically written off, allowing you to focus on improving your financial situation without worrying about repayments. 

Debt Relief Order (DRO)

A DRO is a cost-effective solution designed for individuals with limited assets, very low income, and who are struggling with debts below £30,000. 

The DRO allows you to stop making payments toward included debts for 12 months. If, after this period, you still can't afford to pay, the debts will be written off.

Debt Management Plan (DMP)

DMPs are informal arrangements to help you manage and repay your unsecured debts. With a DMP, you consolidate multiple debts into one affordable monthly payment, often with reduced interest and charges. 

While DMPs aim to help you pay your debts in full, they often provide greater flexibility and more manageable repayment terms.

Key Takeaways

  • Bankruptcy is a last resort when you can't repay your debts, offering legal debt relief
  • It's a formal procedure available in England and Wales. In Scotland it’s called Sequestration
  • Qualifying debts like loans and credit cards can be included in the bankruptcy estate
  • Certain debts, such as secured loans and student loans, can't be discharged in bankruptcy
  • While bankruptcy can offer debt relief, it comes with severe restrictions and will impact credit
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