The economic slowdown caused by the coronavirus pandemic has greatly affected borrowers struggling with debt problems. According to a Financial Times report, hundreds of UK citizens are worried about their finances with the worst-affected ones already considering extreme measures like bankruptcy or personal insolvency.
Declaring bankruptcy is not a decision that should be taken lightly. In the UK, bankruptcy is a legal solution that can affect every sphere of your life. The decision to file for bankruptcy can affect spending patterns, present lifestyle, assets, and future financial decisions of the applicant.
That is exactly why you need to think carefully and consider all your options before deciding on bankruptcy. Read on to understand what bankruptcy is, how it can affect your life, and what other options you have.
It’s important to think of bankruptcy as ‘the last resort’. Declaring bankruptcy can help individual debtors with serious debt issues start afresh but it can also be an unnecessarily expensive option for others.
If you’re struggling with any debt problems or financial difficulties, we strongly recommend that you learn more about bankruptcy and speak to a professional debt advisor to decide the best course of action.
What is Bankruptcy?
Bankruptcy is a type of insolvency for borrowers who cannot repay the money they owe within a reasonable amount of time. Bankruptcy is a legal status that usually lasts a year. It allows debtors based in England and Wales (for Scotland, see ‘sequestration) to write off their remaining debt and make a fresh start.
When someone goes bankrupt, all their excess income goes into repaying their creditors. They are also expected to sell their non-essential assets (property and belongings) to repay what they owe. At the end of the year, most of the remaining debts are written off.
Bankruptcy has its pros and cons. It is a legal insolvency procedure that does not work for everyone.
Bankruptcy and Insolvency: What’s the Difference?
The terms ‘insolvency and bankruptcy’ are often used interchangeably but their meanings differ:
Insolvency is usually defined as the financial state in which an individual is unable to repay their debts and other bills. A person is insolvent when their total liabilities (e-g debts) exceed their total assets.
Bankruptcy, on the other hand, is an actual court order that covers how an insolvent individual is going to repay their debt. It may also include information on which non-essential assets will be sold to pay back creditors.
How Can Bankruptcy Affect Your Life?
Bankruptcy can have major consequences – and not just for you but your loved ones as well. Here are some of the ways the decision to declare bankruptcy can affect you in the UK:
- You Will Have to Sell Assets
Within 2 weeks of declaring bankruptcy, you will be assigned an Official Receiver who will check your valuable possessions to put together a repayment plan. The appointed Official Receiver can sell your assets and valuable possessions to repay your debts.
Not all of your possessions will be seized and sold off; you can keep items you and your family need for living (clothing, furniture, bedding) as well as work-related equipment (your tools or vehicles). However, you may be required to trade these items in for cheaper versions.
If you are a homeowner, you may have to sell your property. The Official Receiver will decide this based on who owns the house, what’s it worth, and whether your property value exceeds your mortgage.
- Your Earnings
The Official Receiver will also look at your income and outgoings (like mortgage, rent, utility bills, living expenses). They may ask you to contribute a share of your surplus income (income – outgoings) into your repayment efforts.
The Official Receiver could then request you to sign a three-year-long ‘income payments agreement’ to pay monthly installments from your income. If you do not pay or refuse to sign the agreement voluntarily, the Official Receiver can also apply for an income payment order against you from court to get you to pay.
You will also be legally required to keep the Official Receiver in the loop, as far as your financial situation is concerned. If your circumstances change, you will have to notify the Official Receiver so they can change the arrangement accordingly.
- Your Bankruptcy Will Be Public Knowledge
Declaring bankruptcy in the UK is not a discreet affair. Details of your bankruptcy will be kept in the Insolvency Register and may appear in local publications.
- Your Credit File Will Be Affected
The bankruptcy will show on your credit records for six years or longer. Since lenders tend to check credit files, you may find it difficult to borrow money during your bankruptcy. You will also be required to disclose your bankruptcy to lenders when borrowing over £500. Moreover, employers and landlords can also check your credit information before hiring you or letting property to you.
Even if you find someone to lend to you, they may consider you a ‘high-risk’ client and lend to you on very high-interest rates. Even after this six-year duration has elapsed and your file has been cleared, your lenders can still inquire if you’ve ever been bankrupt.
- Bank Account Closure
During the bankruptcy proceedings, your bank account could be closed. However, you may be able to open up a basic bank account using which you can store and pay money. Basic bank accounts are designed for people with bad credit records so they don’t offer any additional overdraft services.
- Your Passport Could Be Taken Away
While it only happens rarely, the courts can direct that your passport be taken away and you be impounded. The courts usually exercise this power to prevent individuals from travelling abroad to sell their assets.
- Bankruptcy Can Affect Your Spouse Too
If you are financially linked with someone, declaring bankruptcy could also indirectly affect their ability to borrow. Examples of financial connections include joint bank accounts or shared mortgages. If you’re not financially linked to someone, their credit information would remain unaffected, regardless of whether you live with them or not.
Also, if your partner shares a property with you or has possessions with you, they could be sold to help repay the money you owe. Mostly, when this happens, they can either buy out your share or agree to a fixed value for the item. When the item is sold, the money is split between your partner and creditors.
- It Can Be a Nerve-Wracking Experience
Declaring bankruptcy is not an easy decision – it takes an emotional toll of its own. Between the legal obligations, the paperwork and correspondence with your Official Receiver, bankruptcy can be an exhausting and laborious process.
- Declaring Bankruptcy Can Be Expensive
Whether or not bankruptcy is an expensive option for you depends on various factors such as the level of your debt and your individual circumstances – but the process itself can be overwhelmingly costly for some debtors.
It costs £680 to apply for bankruptcy and you will need to submit this amount before submitting your bankruptcy form. Since this is a hefty sum for someone with money problems, it’s crucial to make sure that bankruptcy is the best solution for your debt issues.
Out of all the debt solutions available, bankruptcy is probably the most serious one. If you declare bankruptcy, you may have to lose valuable possessions and property. Besides, you need a minimum debt of £5,000 to file for bankruptcy.
Bankruptcy can be an expensive and grueling process. It’s not the default solution for all debt problems. Financial experts say that bankruptcy is not even inevitable; early intervention can help you manage your debt and avoid bankruptcy.
There are several other arrangements you can make with your creditors to regain control of your finances and become debt-free. An example is an individual voluntary arrangement (IVA) that protects your assets and can get up to 90% of your debts written off.
Let’s take a look at some of the bankruptcy alternatives available in England and Wales:
- Individual Voluntary Arrangements:
A formal insolvency arrangement is negotiated by a licensed insolvency practitioner on your behalf. IVAs are a great alternative to bankruptcy as they can result in up to 90% of total debt written off. IVA is an option for people with severe debt problems and it can put an end to creditor harassment.
- Informal Agreements:
In these agreements, you write to your creditors and agree to a repayment schedule.
- Administration Orders:
The Enforcement of Judgements Office (EJO) mediates the debt issue and orders you to repay through administration orders. EJO also assumes the responsibility of collecting repayments and disbursing them amongst your creditors.
- Debt Relief Order:
Debt relief orders are an option for smaller debts. You may be able to apply if you’re defaulting on a debt of less than 20,000.
Individual voluntary arrangements or IVAs condense many debts into one affordable, monthly payment that you have to make for a fixed duration (usually 5 years). After an IVA term ends, the rest of your debt is written off.
If you’re wondering whether an IVA would work for you, you can read about IVAs – or seek help from one of our experienced debt advisors. They can help you evaluate your options and decide whether an IVA will work for you.
Get Debt Advise Now
Declaring bankruptcy is a big decision that can affect your life. That’s why you should consult a debt advisor before settling for a debt solution. At Money Advisor, we have a team of friendly and professional debt experts who can help you figure out what works best in your situation. Get debt advice!