If you’re struggling with debt and don’t have enough money to repay what you owe, bankruptcy might be a suitable option for you.
Bankruptcy can give you peace of mind from your unaffordable debt by pausing all contact from the people you owe money to (your creditors) and writing them off after a set period. In other words, you won’t have to pay anything towards your debt.
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What is bankruptcy?
Bankruptcy is a legal process designed to help you deal with the debts you can’t afford to pay in England, Wales, and Northern Ireland. It can give you a fresh start to rebuild your financial situation if you have little to no surplus income to put towards debt repayment and other debt solutions have been ruled out.
The types of debt that can be written off with bankruptcy include credit cards, personal loans, overdrafts, store cards, catalogues, utility bills, and council tax. However, court fines, student loans, and debts accrued due to fraud can’t be included in a bankruptcy.
During bankruptcy, you won’t have to pay anything towards your debt and your creditors won’t be able to contact you or take legal action against you.
It’s important to remember that while bankruptcy can help you deal with your unaffordable debt, it should only be considered as a last resort as it can cause significant credit damage and your assets will be at risk.
How long does bankruptcies last (UK)?
In the UK, bankruptcy typically lasts 12 months.
During this time, there are certain restrictions you’ll need to stick to for your arrangement to be a success.
After 12 months, you should be automatically discharged from the bankruptcy process and any debts included will be written off. This will happen as long as your financial situation doesn’t improve in the 12 months since you were declared bankrupt.
However, if it’s discovered that you’ve broken the rules of your bankruptcy or you’ve failed to cooperate with the trustee managing your arrangement, your bankruptcy could be suspended indefinitely and the restrictions placed on you could be extended for up to an extra 15 years.
How much debt do you have?
How does the bankruptcy process work?
The bankruptcy process typically follows the same set of steps, regardless of provider.
Here is a brief guide to what you can expect when you apply for bankruptcy:
Do your research
Before you apply for bankruptcy, you must do your research to ensure you’re aware of the potential pros and cons.
For example, although there is no minimum debt level required and it only lasts a year, it puts your assets at risk and can have a lasting impact on your finances. Knowing this information ahead of time can help you prepare.
Complete an application
Once you’re confident bankruptcy is the right solution for you, you’re free to begin the application process. Your creditor can apply to make you bankrupt if you owe them a significant amount (£5,000 or more), but in most cases, you’ll need to file your own bankruptcy petition by downloading and completing a form from the GOV.UK website.
There is a fee required to apply for bankruptcy (currently £680), which you must pay when you submit your application.
Await a decision
All bankruptcy applications are sent directly to the Insolvency Service. There, an official receiver (an officer of the court whose principal duty is to protect the bankrupt’s estate) will have 28 days to review the information provided and compare it against the eligibility criteria for bankruptcy to decide whether or not you’re a suitable candidate.
If your application is approved, you’ll usually be declared bankrupt the same day.
Begin your bankruptcy
Once you’ve been officially declared bankrupt, a trustee will be appointed to manage your arrangement and take control of your assets.
From this point, you’ll be expected to stick to several rules and restrictions until you’re discharged 12 months later.
What happens after a bankruptcy order is made?
Bankruptcy can give you a break from dealing with unaffordable debt, but it can have a significant impact on your day-to-day life.
Here are some of the things that will happen after you’ve been made bankrupt:
Your bank account might be frozen
Usually, your bank or building society account will be frozen as soon as you’re made bankrupt – even if none of the included debts are with your bank or building society. This means that you won’t be able to add or withdraw money or use any cards associated with that account.
It can be difficult to find a bank willing to let you open a new bank account when you’re bankrupt, but it’s not impossible. In most cases, you’ll only be eligible for the most basic bank account from each provider and you won’t be able to access an overdraft.
You’ll need to surrender your assets
During bankruptcy proceedings, you’ll need to hand over control of your assets (e.g. your home, car, savings, and valuables) to your trustee. They will then be free to sell them to recover as much of the money owed as possible.
The trustee has a three-year period from the date the bankruptcy order is made to deal with your interest in your property.
You’ll be placed under certain restrictions
For your bankruptcy to be successful, you must adhere to certain rules for the duration of your arrangement.
For example, you can’t borrow more than £500 without informing the lender that you’re bankrupt, act as a company director without the court’s permission, be the trustee of a charity, hold certain public offices, or work as an insolvency practitioner.
You might have to make regular payments
If your trustee thinks you have surplus income that’s over and above the amount needed to maintain a reasonable standard of living, the money left over each month will go into an ‘Income Payment Agreement’ (IAP) or Income Payment Order (IPO). Usually, you’ll continue to make regular payments for up to three years after your discharge date under an IAP or an IPO.
You’ll also need to continue making payments towards your regular outgoings (e.g. rent and bills) during your bankruptcy as well as any new debts acquired since the bankruptcy order was made.
What counts as assets for bankruptcy?
It’s normal to worry about which of your personal belongings could potentially be taken and sold when you’re made bankrupt. However, no items that you need to maintain a reasonable standard of living should be seized.
This includes essential household items (e.g. clothing, bedding, furniture) and belongings that are necessary for work or education (e.g. tools, textbooks, equipment).
The general rule of thumb is that, if something is worth more than is necessary, you’ll likely be asked to give it up. For example, if your car is deemed unnecessarily expensive or you own valuable jewellery or electronics that you can easily live without, your trustee will take control of it.
Your trustee will assess the value of your assets and determine which will be sold and which you can keep on a case-by-case basis. It’s worth noting that any assets acquired after your bankruptcy order is made can also be claimed by your trustee.
How long does bankruptcy stay on my credit file?
Like most debt solutions, bankruptcy will be visible on your credit report for six years. During this time, your credit rating will be affected and you’ll find it extremely difficult to obtain credit from a lender.
This means that, even if you’re discharged from bankruptcy after 12 months, you’ll struggle to borrow money for a loan or mortgage for another five years.
Most lenders tend to view bankruptcy more harshly than they do other solutions as it indicates that your finances have reached the point of no return and there’s a greater chance that you will default on future credit agreements.
Some lenders might ask if you’ve ever been bankrupt if you apply for credit after six years have passed and while you’re not legally obliged to tell them about your bankruptcy, it’s in your best interest to be upfront and honest. If they find out you lied, this could affect their decision to lend to you.
As well as your credit record, your bankruptcy will also be added to a public register known as the Individual Insolvency Register (IIR), which is an online database of all individuals in insolvency solutions in the UK, including bankruptcies, DROs, and IVAs.
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What happens after the bankruptcy period ends?
Most bankruptcies automatically end after 12 months, but this doesn’t mean your financial situation will be fixed overnight. Your trustee will explain the discharge process to you nearer the time, but it can be useful to know what to expect, regardless of where you are in your arrangement.
On your discharge date, your bankruptcy restrictions will be lifted and all the included debts will be written off which means you’ll no longer be expected to pay them. Your trustee also can’t claim any new assets that come into your possession from this point unless it’s discovered that you owned them before you were discharged.
Once your bankruptcy ends, the main credit reference agencies will be notified and your arrangement will be removed from all public records, including your credit record.
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Conclusion
Whether you’re considering bankruptcy or you’re halfway through your arrangement, it’s important you know what to expect from the process and how long it’s likely to last.
Most bankruptcies last a year, after which time the included debts will be written off and you’ll be free to start rebuilding your finances.
Dealing with debt can be stressful, but you don’t have to face it alone. Reaching out for free debt advice can help you gain a better insight into how bankruptcy affects different aspects of your life.
