If you have debts you’re struggling to repay, you may have considered filing for bankruptcy to help you get some much-needed relief and make a fresh financial start. But with so much conflicting information about bankruptcy, it can be difficult to know which type is right for you.
However, in the UK, there is only one main type of bankruptcy compared to the US where there are several options depending on whether you’re filing on behalf of yourself, a business, or a corporation.
What is bankruptcy?
Bankruptcy is a legal status that gives you a period of temporary relief from your unaffordable debt before writing it off (wiping it clean). It usually lasts 12 months, during which time the individuals or companies you owe money to (creditors) won’t be able to contact you, ask you to repay the debt or take legal action against you.
During a bankruptcy period, any non-essential assets, such as properties or vehicles, and excess income can be seized and sold to repay the debt. If you get to the end of the 12 months and your financial situation hasn’t improved, the debt will be written off and you’ll be free to move on and make a fresh financial start.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Bankruptcy is reserved for individuals who have debts of at least £5,000 and have been declared insolvent (unable to pay your financial obligations as they’re due). It should only be considered as a last resort due to the impact it can have on your finances – especially your credit rating.
It can’t be used for secured debts (except in exceptional circumstances) and any ongoing payments, such as housing and utilities, will need to be paid as normal during your bankruptcy period to prevent your financial situation from getting worse.
The only time you’ll need to pay anything during bankruptcy is if you have any money left over after your essential costs have been met. If this is the case, the OR will set up a type of repayment plan called an ‘income payment agreement’ and you’ll need to pay 100% of any surplus income over £20.
What is the Minimal Asset Process (MAP)?
The Minimal Asset Process (MAP) is a type of bankruptcy designed for individuals who are on low incomes and have minimal assets. It is only available in Scotland and is considered a cheaper and simpler alternative to bankruptcy (known as sequestration in Scotland).
Most MAPs last six months, during which time you’ll be protected from creditor contact, legal action, and extra interest and charges. Once six months have passed, all unsecured debts included in the MAP will be written off and you won’t need to pay them.
However, like standard bankruptcy, having a MAP on your credit report can lower your credit score and have a severe impact on your finances for several years, making it difficult to access most types of credit, from a loan to a mortgage.
How does the bankruptcy process work?
The bankruptcy process usually follows the same set of steps, regardless of provider. We’ve outlined what you can expect when you declare bankruptcy below:
Do your research
The first step in the bankruptcy process is doing your research to ensure it’s the right option for you. Even if you qualify, there may be another, less damaging solution that is better suited to your circumstances.
Bankruptcy can be an effective way of dealing with your debt, but it isn’t for everyone. Most financial experts recommend seeking free and impartial debt advice before filing for bankruptcy to ensure you’re making the right decision.
Complete your application
If you’ve done your research and sought free advice to ensure bankruptcy is the right option for you, you can access an application from the GOV.UK website. The form will ask for details of your income, outgoings, debts, and assets.
There is a fee of £680 to apply for bankruptcy, but this can be paid in instalments or waived completely if you’re on a low income or receive certain benefits.
Await a decision
Once your application has been submitted, you’ll usually be told if it has been approved or rejected within 28 days. The adjudicator may contact you to request further information which, once received, will give them an extra 14 days to make a decision.
If your application is rejected, you can request a review of their decision within 14 days but can’t provide any new information. In other words, the adjudicator can only consider the information you provided in your original application.
Start your bankruptcy order
Once the bankruptcy order has been made, you’ll be officially declared bankrupt. From this point, your assets will come under the control of a court-appointed ‘trustee’, who will manage your arrangement and communicate with your creditors going forward.
In most cases, your bank account will be frozen as soon as your bankruptcy order is made and you’ll need to open a new bank account as soon as possible.
How much debt do you have?
Is bankruptcy right for me?
Before applying for bankruptcy, there are several factors you must consider to determine if it’s the right solution for you. We’ve outlined the most important considerations below:
Which debts are covered
It’s crucial to review your total debts before filing for bankruptcy. For example, if all of your debts are unsecured, you should be able to include them all in your arrangement.
However, if most of your debts are made up of court fines or student loans, bankruptcy is unlikely to be the right solution for you.
What you’ll need to pay
Bankruptcy is designed for people with little to no disposable income who are unable to pay what they owe, but there is still a £680 application fee required.
This can be paid in instalments or covered by a grant or charity if you can’t afford it or your sole income is benefits, but the full amount will need to be paid before your application can be submitted.
How your home will be affected
Regardless of whether you own or rent your home, it’s crucial to research how bankruptcy could affect where you live and, more importantly, whether you’ll be able to consider living in the same property.
Generally, bankruptcy should have no impact on you if you rent your home and you should be able to continue living there with no problems. However, if you own your home, the OR might want to sell it to help them recover the money owed.
What are the most common types of bankruptcy?
There is a lot of information online about the different types of bankruptcy available, but this mainly relates to the US. In the UK, there is only one type of bankruptcy that you need to know about and only individuals can declare themselves bankrupt, not companies.
In the US, both individuals and companies can apply for bankruptcy and there are various types you need to know about, including chapter 13, chapter 7 (also known as liquidation bankruptcy), and chapter 11.
The basics of bankruptcy, however, are similar in both countries. In simple terms, it exists as a way for individuals to take a break from their unsecured debts and make a fresh financial start by stopping all creditor contact and writing off a large percentage of the money owed at the end of a fixed period.
What types of debts can be included in a bankruptcy?
Bankruptcy can be used to deal with a wide range of personal debts, including credit cards, store cards, overdrafts, catalogues, personal and payday loans, council tax, utility bills, and benefits overpayments (unless they’re obtained fraudulently).
However, certain debts are exempt from bankruptcy and you must continue to pay them as normal during your arrangement. This includes child support payments, student loans, TV licence arrears, criminal fines, mortgages and most other types of secured debt.
It’s also important to note that any debts taken out after the bankruptcy order is made cannot be added to your arrangement. For example, if you rack up council tax arrears during your bankruptcy period, you’ll need to deal with them separately (e.g. by negotiating a payment schedule with your local council).
How does bankruptcy affect my credit score?
The impact of bankruptcy on your credit score can be disastrous. This is why it’s crucial to consider all alternative options before filing for bankruptcy.
From the date your bankruptcy order is approved, it will stay on your credit report for six years or until you’re discharged if this takes longer. During this time, lenders will be able to see you applied for bankruptcy and are unlikely to approve you for credit.
Furthermore, you must inform a lender if you want to borrow more than £500 and some lenders – especially employers and landlords – will review your credit information before agreeing to employ you or rent a property to you.
Even if you find a lender willing to enter into a credit agreement with you, they’ll likely view you as high risk and charge you a higher interest rate. Most lenders will also ask if you’ve ever been bankrupt when you apply for a mortgage.
Will a personal bankruptcy affect my business?
Bankruptcy can have a significant impact on your business and your ability to continue working in certain industries and roles, but how bankruptcy affects your business depends on whether you’re a sole trader or own a limited company.
If you’re a sole trader
If you’re a sole trader, there is no guarantee that you’ll be able to continue running your business as usual. In most cases, you’ll usually be able to continue trading but with certain restrictions.
However, the OR might request that you sell your business and you may need to let go of any employees or sell your stock if it’s classed as business assets.
If you own a limited company
If you own a limited company, you won’t be able to continue your role as company director or be involved in the running or promotion of the company without the permission of the court.
However, if there are other directors within the company, you might be able to resign and simply hand over your responsibilities to ensure a smooth transition with as little disruption as possible.
Can a creditor make me bankrupt?
In some situations, your creditor might petition for your bankruptcy – even if you don’t agree with them or don’t want to settle your debts in this way. However, this is usually only used as a last resort.
This might happen if they’ve tried to recover the debt through various other means but have been unsuccessful, you owe a significant amount of debt (over £5,000), or you have enough assets for this to be a viable route.
Once the court receives the application from your creditor, they will set a date for a bankruptcy court hearing, which you’ll be required to attend. This will be overseen by a district judge, who will either dismiss the petition (e.g. if you’ve already paid the debt), suspend all bankruptcy proceedings, or make a bankruptcy order.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
What are some alternatives to bankruptcy?
Bankruptcy can give you some much-needed relief from your unaffordable debts for a temporary period. However, it can have a disastrous impact on your finances and should only be chosen if all other options have been considered.
Here are some of the most common alternatives to bankruptcy:
Debt Management Plan (DMP)
A Debt Mangement Plan (DMP) is an informal agreement between you and your creditors to repay your debt in a way that’s reasonable for you. This usually involves a single monthly payment which is sent to a third party and distributed among the people you owe.
The amount you’ll be asked to pay depends on a variety of factors, such as your financial situation and how much you owe. In most cases, all interest and charges on the debt will also be frozen.
DMPs are available throughout the UK.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a formal agreement where you pay unsecured creditors through a series of monthly payments based on what you can realistically afford. Similar to a DMP, it also involves sending a fixed amount to a third party who will then share the money among the people you owe.
Because it is a formal agreement, you and your creditors will be legally bound by the arrangement and must stick to the terms and conditions for the duration (usually five years).
IVAs are available in England, Wales, and Northern Ireland.
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a way of dealing with your debt by writing off the debts you can’t afford to pay. It works in a similar way to bankruptcy by stopping all creditor contact and interest and charges, but it tends to have less of an impact on your credit score and finances in general.
Like bankruptcy, a DRO also lasts 12 months. Once a year has passed, all included debts will be written off and you won’t need to pay them.
DROs are available in England, Wales, and Northern Ireland.
Debt Arrangement Scheme (DAS)
The DAS is a government-led scheme designed to help you repay creditors you owe in a way that’s more manageable for you.
Under a DAS, you’ll enter a Debt Payment Programme (DPP), which you’ll make a single monthly payment to. This money is then divided among your creditors evenly to ensure they receive a regular portion of what they’re owed.
DAS’ are only available in Scotland.
Conclusion
Bankruptcy is the process of discharging you from the debts you can’t afford to repay. It works by giving you a period of relief from the people you owe and writing off your debts after this time if your financial situation doesn’t improve.
There is only one type of bankruptcy in the UK. The US, in contrast, has six different types, each with their own advantages, disadvantages, and eligibility criteria.
It’s important to seek advice from a personal finance expert and familiarise yourself with bankruptcy laws in the UK before submitting your application. The more you know about how bankruptcy code works, the more prepared you can be.
