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What does bankruptcy involve?
Bankruptcy is a form of insolvency for people who are in serious financial difficulty. Essentially, declaring bankruptcy is an official announcement stating that you can't repay what you owe. After a certain period (usually one year), during which your assets and property might be sold to pay some of your debts, any remaining unsecured debt may be cancelled.
Declaring bankruptcy comes with a set of restrictions which can affect several aspects of your life. Nobody does it lightly – it's sensible to explore the available options before considering this route. However, for some people it offers a chance to make a fresh start.
When you are declared bankrupt, a court will issue a bankruptcy order against you and a court officer called the Official Receiver will handle the process. The Official Receiver will take control of your property, which could include your house, your car, and any other assets you own. They will also deal with creditors on your behalf, which might involve selling your assets to repay some of what you owe.
Your bank accounts might be closed or frozen. In some professions, including the police force and armed services, being declared bankrupt can also impact your job. If you still receive income, you may need to make arrangements with your bank or the Official Receiver regarding where your income will be paid.
You may also be placed under bankruptcy restrictions, which may mean you cannot:
Borrow more than £500 without telling the lender you’re bankrupt;
Act as a director of a company without the permission of the court;
Manage a business without telling the people you do business with that you’re bankrupt;
Create, manage or promote a company without the court’s permission; and/or
Work as an insolvency practitioner.
These restrictions normally end after one year when your bankruptcy ends, although they can be extended if, for example, you fail to cooperate with the court or the Official Receiver.
Finally, your name and details will be published on the Individual Insolvency Register, a public list of people who have been declared insolvent. This is one of the things lenders check when considering whether to lend to you.
Alternatives to Bankruptcy
If you're considering bankruptcy, it's probably because you owe far more money than you can afford to repay.
However, there are some alternatives to bankruptcy:
If your debts total less than £5,000, you have more than one creditor and you have a county court or High Court judgement against you, you can apply for an administration order. This might reduce the overall amount of debt you have to pay and will divide your repayments into monthly instalments, determined by the court. You must be able to provide evidence that you can meet the repayments, and you will have to pay a court fee (of not more than 10% of your total debt) each time you make a repayment.
Debt relief order
If your debts total less than £20,000, you're not a homeowner and your spare income is less than £50 a month, a debt relief order (DRO) can be applied for. With a DRO you pay nothing toward your debts for 12 months (although this can be reduced or extended depending on your circumstances), and after that period your debts are written off. However, you will have to pay a fee (£90 at the date of publishing) to the Insolvency Service to begin the process, which you won't get back even if the DRO is rejected.
Individual Voluntary Arrangement
Under an Individual Voluntary Arrangement (IVA), you work with an insolvency practitioner and agree to a plan to pay back your debts. Under an Individual Voluntary Arrangement your assets don't become property of the court, so you have greater control over what is sold to cover what you owe. You can continue to have a bank account, and there are usually fewer restrictions on your activities. However, your creditors must agree to the IVA as well, and you might end up paying back more than if you had gone bankrupt. Additionally, if your IVA fails because you couldn't meet the repayments, you could still become bankrupt and be in a worse position than before.
What is and isn't covered by bankruptcy?
One important aspect of bankruptcy is that only unsecured debts may be written off after the one-year period ends. Unsecured debts mean money that has been lent to you without you providing any form of security or something the lender can take if you fail to repay. Bank loans and money owed on credit cards are usually examples of unsecured debt.
Secured debts include things like mortgages (secured debts against the property) and car loans (secured debts against the vehicle), and the effect bankruptcy has on them varies from case to case.
If you own your home, your house may be sold to repay your debts, or if it is repossessed. The Official Receiver will usually only consider selling your home if you have more than £1,000 worth of equity in it. If there is negative equity in your home when you give it up – i.e. it's worth less than the mortgage secured on it – this debt is then included in your bankruptcy and you won't have to pay the difference. If you do stay in your home, you will have to keep paying your mortgage as normal, and it won't be written off after your bankruptcy ends.
Any rental arrears owed to your landlord may be written off as part of the bankruptcy, and they will not be able to enforce any rental collection from you. However, they can still evict you, and may decide to do so. It can be difficult to get another rental property once you are on the Insolvency Register.
If you bought your vehicle via a loan, a hire purchase scheme, or a conditional agreement, you may be able to keep it if you can continue making repayments and if the Official Receiver agrees that your vehicle is essential. Otherwise, it may be repossessed. Vehicles paid for under the Motability Scheme will not usually be affected by the bankruptcy order. You will be able to continue using it and it won't be repossessed.
Debts and responsibilities that will not usually be written off by bankruptcy may include, for example:
Child maintenance (including arrears);
Any payments made under a confiscation order;
Social fund loans; and/or
Any debts you owe due to the personal injury or death of another person.
What happens when the bankruptcy order ends?
You will usually be discharged from bankruptcy 12 months after the date the bankruptcy order was made. Your bankruptcy restrictions will end, unless they have been extended for dishonest or uncooperative behaviour. Your details will remain on the Individual Insolvency Register for another three months, but it will be noted that you are discharged from bankruptcy.
Normally, you will not get back any property that was taken by the Official Receiver, even if it still hasn't been sold. In some instances, your home may be returned to you if it remains unsold for three years after the bankruptcy order was made.
Any new assets you gain after you are discharged are yours to keep, but if you have an income payments arrangement or order in place, these might not end when you are discharged. They will continue for the agreed-upon length of time regardless of whether you have been discharged or not.
Getting credit after bankruptcy can be challenging. Lenders might still ask whether you have ever been declared bankrupt in the past. Even after your name has been removed from the Individual Insolvency Register, the bankruptcy will usually stay on credit reference agencies' records for six years.
Vanquis Bank will consider applications from people who have been discharged from bankruptcy. When used sensibly and responsibly, our credit cards for bad credit can help people to rebuild their credit rating and eventually gain access to other forms of credit again. Find out more here.
Where can I get more advice about bankruptcy?
Before you even consider bankruptcy, it is sensible to discuss your situation with an impartial advisor. There are a number of charities and organisations who specialise in helping people who are facing serious financial difficulty, who will be able to help you assess your best options.
StepChange is a charity that offers free debt management help and advice. They have a number of guides on various financial issues, as well as a helpline for personalised support.
The Money Advice Service has a lot of information to help people improve their finances, as well as detailed guides to any benefits and services you're entitled to. They operate the Money Advice Line.
The Insolvency Service is operated by the UK government and helps people to find licensed insolvency practitioners. These are people, usually with a legal or accountancy background, who can help guide people through bankruptcies and IVAs.
Citizens Advice provides independent and confidential advice for all kinds of issues in life, particularly legal and financial problems. The site contains detailed guides to bankruptcy and rebuilding credit.