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What is bankruptcy and how does it work?

If you’re in severe financial difficulty, one of the options available to help you get on top of your debt is bankruptcy.

8.3 million people in the UK are now struggling with problem debts and there are a number of potential financial repayment options for you to reduce your payments.

Although Individual Voluntary Arrangements (IVAs) offer a good alternative to bankruptcy, giving you more control of your assets and more breathing space, for some people a solution which lasts five or six years may be too long and bankruptcy may seem the more preferable option.

Here’s everything you need to know about going bankrupt.

What is bankruptcy?

Bankruptcy is a form of insolvency which helps you to deal with debts you can no longer manage by selling off certain assets.

It is most suitable for those with minimal assets who cannot make minimum payments towards creditors.

Bankruptcy typically last for one year.

If you live in Scotland, the equivalent to bankruptcy is sequestration.

Is bankruptcy for me?

Bankruptcy is a form of insolvency and therefore only suitable if you can’t pay back your debts in a reasonable time.

Bankruptcy can provide a fresh start especially if you cannot afford to make monthly contributions to your unsecured creditors and you have minimal assets.

If you’re declared bankrupt, assets you own, such as your house or car will usually be sold to pay off your debts. So if your assets are worth more than your debts, or if all of your regular payments are up to date and you can afford to keep paying them, bankruptcy probably isn’t the best option for you.

Bankruptcy only covers unsecured debt such as credit cards, loans, arrears of council tax and utilities, revenue debt including overpaid tax credits and shortfalls on properties that have been sold. Debts such as matrimonial debts, student loans and court or criminal fines are not covered by bankruptcy.

After you’ve been declared bankrupt, your creditors will write off your unsecured debts, allowing you to make a fresh start. Bankruptcy usually lasts for 12 months and you’ll have many financial restrictions during this period. When your bankruptcy ends, you’ll be ‘discharged’ from it.

If you go bankrupt you may find it difficult to take out any further credit, as bankruptcy will remain on your credit file for six years.

If your unsecured debts are less than £20,000, you don’t own a home, have savings and have assets worth less than £1,000 and you have £50 or less left over each month after you have settled household expenses, a Debt Relief Order (DRO) or Individual Voluntary Arrangement (IVA) may be a more suitable option for you.

How do I declare myself bankrupt?

Traditionally, an application for bankruptcy was submitted through the courts. However, since 2016, applications are submitted online and do not involve the courts.

The fee charged for going bankrupt is £680. This fee consists of a £130 adjudicator fee, and a £550 bankruptcy deposit.

Creditors can also petition for your bankruptcy but only if your debt exceeds £5,000. The fee a creditor has to pay to petition for your bankruptcy includes the petition deposit of £990, the court fee of £280 plus their solicitor’s legal fees which could increase the total to £2,770.

Because of the fees, creditors are more likely to pursue the judgement route to secure debt payments either by instructing bailiffs to uplift your goods, Income Payments Orders or Charging Orders.

How will Bankruptcy affect me?

Before entering into bankruptcy, you should be aware that it could have an impact on your life for years. You should be fully aware of the following limitations during the period of the Bankruptcy order:

• Assets you own which are not excluded from bankruptcy will have to be sold and the funds paid into your bankruptcy. This includes any equity you own in a property or your car where the value is above £1,000 and your car is not classified as a tool of trade.

• Surplus income after taking into account your reasonable costs of living has to be paid to your Trustee for a period of 3 years. This continues even though you get your discharge as explained below.

• You are automatically discharged from bankruptcy 12 months after the bankruptcy order. The automatic discharge can be suspended if you fail to co-operate with your Trustee. The discharge does not stop your Trustee from dealing with your assets and collecting monthly income contributions.

• You will be unable to act as a director of a company or be involved in running a business without the permission of a court.

• Bankruptcy could prevent you from working in particular industries, especially financial services which are regulated. For certain professionals including solicitors and barristers, there is a risk that if made bankrupt you could face a Bankruptcy Restriction Order being made against you which could restrict your ability to continue in practice.

• Your details will be on a searchable register (Individual Insolvency Register) for a period of 6 years and this is likely to prevent you from accessing credit.

• You will be unable to get credit of £500 or more without telling the lender that you are bankrupt.

There is more information about the advantages and disadvantages of bankruptcy here.

Speak to one of our Money Advisers today to discuss whether bankruptcy is the best option for your circumstances.

If you are struggling with debt, Money Advisor may be able to help. Find out how we can help you reduce your repayments and advise on a range of financial repayment options. Contact us today for expert, confidential advice with no obligation.

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