Living with bankruptcy: what it means to go bankrupt in the UK


Bankruptcy sign being held by woman in business suit

Bankruptcy is a pretty dire prospect - but may sound quite attractive when you trawl through the multitude of bankruptcy help websites. All your debts written off! Who'd say no to that?

However, you should think very carefully before going down that route. Bankruptcy should always be a last resort. It could have serious and sometimes unexpected implications. What does life as a bankrupt, and after bankruptcy, look like?

You could easily lose your home and car, wave good-bye to your bank account and credit cards and become persona non grata with banks and other lenders. There is a risk of losing your job or being debarred from applying for other jobs, as some professions don't employ bankrupts.

How to go bankrupt
You can apply for personal bankruptcy – a court order – if you are unable to pay your debts. Bankruptcy usually lasts 12 months, and when you are discharged you will usually emerge debt-free. But certain debts cannot be written off, for example court fines, benefit overpayments and student loans.

You apply for bankruptcy through your local county court. An officer of the court called an Official Receiver then takes control of your money and property and deals with your creditors on your behalf. You need to inform your Official Receiver of any changes to your circumstances - any changes to your income or benefits, or if you move house or have a baby.

You may be broke, but filing for bankruptcy is not free. In England and Wales there is a fee of £700 (£175 goes to the court and £525 to the Official Receiver). If you are on a low income or receive benefits you might escape the court fee, but not the Official Receiver's fee.

If you have a lot of debts and no way of repaying them, are constantly being harassed by debt collectors and feel like you are losing control, bankruptcy might be the best option. You can draw a line under all that mess and make a fresh start. You won't have to deal with your creditors any more and you are allowed to keep things like household goods and a reasonable amount to live on.

Cons, or life as a bankrupt
Losing control of your finances and possibly your home are the worst impacts.

All available assets will be sold to your creditors to pay back your debts, except those required for a basic standard of living and any items needed for your work, for example tools, books or a vehicle. If you own your home it might well have to be sold, along with your car (if deemed non-essential) and any luxury items.

The StepChange Debt Charity says it is sometimes possible to keep your home by selling a share of the property to a friend or family member and paying the equity from the sale into your bankruptcy.

Also, if your property is in negative equity (i.e. if your mortgage is greater than the value of the property) you might get to keep your home.

If you are renting, your landlord may be able to kick you out as some tenancy agreements don't allow you to stay in the property if you go bankrupt.

Your bank account will be frozen and you must hand over your bank cards, cheque books and credit cards to the Official Receiver, so make sure you have enough cash to live on before you file for bankruptcy. It's up to your bank if they allow you to continue using your accounts. You could also lose part or your entire pension if it is in a scheme that hasn't been approved by HM Revenue and Customs.

You will have to follow certain rules called the 'bankruptcy restrictions' and it's a criminal offence to break them. For example, you can't borrow more than £500 without telling the lender you're bankrupt.

Any spare income will go to your creditors. You will have to make monthly payments for up to three years if you can afford it and the money raised from the sale of your assets doesn't pay your debts.

Bankruptcy remains on your credit file for six years, which means you will find it hard to borrow money during that time.

What's worse, you could end up losing your job or damage your future career prospects. While you are bankrupt, you can't act as a company director. The armed forces and the police don't employ bankrupts. You can't be a postman handling mail that may contain cheques. There are also restrictions on bankrupts in the legal and accountancy professions.

Going bankrupt can also affect your immigration status. The UK Border Agency advises that an application for British citizenship is unlikely to succeed if you are an undischarged bankrupt.

Then there's the public embarrassment of your name and details being published in the 'Individual Insolvency Register,' and your bankruptcy being listed in the local paper.

If you have your own business the Official Receiver will probably close it down, sack your employees and sell off the assets.

Other impacts: bank account and credit card
If your bank account is overdrawn this will be written off, like other debts, but you won't be able to use the account and it may be shut down. However you will be able to open a basic bank account after your bankruptcy. You should speak to your bank about the possibility of keeping the account you have.

It will take years to rebuild your credit rating and getting a credit card is an important step. How soon you can get a new credit card depends on the card issuing company. They may lumber you with punitive terms and conditions – very limited credit, high fees and interest rates.

You could apply for a secured credit card, which is secured against a savings account. If you don't pay your bills on time the credit card company will use the money in the savings account to cover them. A pre-paid credit card is another option. It means you will pay the card issuing company a sum of money in advance and you can use your credit card for up to that amount. This is a good way of keeping tabs on your spending.

Involuntary bankruptcy
Any creditor who is owed £750 or more can apply to have you declared bankrupt. But they can only start bankruptcy proceedings if a county court judgment has already been made against you and court bailiffs have been sent to seize your assets, unsuccessfully.

Creditors must issue a "statutory demand" – a written demand for payment – and give you 21 days' notice, which gives you some time to come up with an acceptable repayment schedule.

If you receive a statutory demand for payment and struggle to repay your debts, you should consider an individual voluntary arrangement (IVA) rather than be forced into bankruptcy.

What is an IVA?
An IVA is a form of insolvency, like bankruptcy. It is a legally binding agreement with your creditors that allows you to pay off your debts through small affordable instalments every month. Consumer group Which? says it is only suitable for those who have a stable income and unsecured debt of at least £15,000.

You can't apply for an IVA yourself. A qualified insolvency practitioner will draw up a repayment schedule for you. An IVA usually lasts three to five years, from which you will emerge debt-free.

Unlike with bankruptcy, you won't lose your possessions. Once an IVA is in place, your creditors won't be able to chase you any more and the repayments are set at an affordable amount. At the end of the IVA any outstanding debts will be written off.

It takes much longer than bankruptcy, and insolvency practitioners' fees can be expensive. As with bankruptcy, the agreement stays on your credit file for six years. And if you can't keep up the payments agreed under the IVA, your creditors could start bankruptcy proceedings against you.

More information has a more detailed guide on bankruptcy.

The StepChange Debt Charity provides free and detailed online debt advice.

Here's the government's guidance on bankruptcy.

The Money Advice Service has more information about debt management

Free debt advice contacts are listed here.

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