This series covers five possible solutions for tackling crippling debt. This is part five in the series with this article focussed on bankruptcy.
I’ll explain what is and for whom it may be suitable. You’ll find out what you’d need to do to apply for bankruptcy, and what going bankrupt may mean for you.
For a brief explanation of Bankruptcy, watch this video from debt charity Stepchange.
What Is Bankruptcy?
Bankruptcy is a legal procedure and a form of insolvency that can write off most debts.
It’s only suitable if you can’t pay back your debts in a reasonable time and your financial circumstances are unlikely to change soon.
To be considered for bankruptcy, you don’t have to have a minimum amount of debt.
Bankruptcy rules in England and Wales vary to those in Scotland or Northern Ireland. In this article, I’ll focus on the rules governing England and Wales.
For residents of Scotland, look at this page by The Money Advice Service and this page by Accountant in Bankruptcy (Scotland’s insolvency service).
Residents of Northern Ireland will find suitable information here.
The bankruptcy period usually lasts for one year.
The Official Receiver informs you of when your bankruptcy period has finished and you’ve been discharged.
After the bankruptcy order ends, the debts included in your bankruptcy get written off/cancelled.
During, and after your bankruptcy, your creditors (the people you owe money to) can’t contact you and must stop most types of further action against you to recover the money owed to them.
If you took out any of your debts via fraud, although your creditor can’t chase you to pay while you’re bankrupt, the debts themselves aren’t written off at the end of the bankruptcy period, leaving you liable to repay them after your bankruptcy ends.
Though bankruptcy may be a suitable debt solution for you, it comes with several financial restrictions you must follow and may affect many aspects of your life.
As with any debt-management, you should discuss it with an expert debt counsellor. You’ll find resources at the end of the article.
Full Criteria for Applying for Bankruptcy
As well as not being able to pay your debts and not expecting your financial circumstances to change in the foreseeable future, to apply for bankruptcy you must fulfil the following criteria:
- Live in England or Wales.
- Carry out business in England or Wales.
- Have done either 1 or 2 in the past three years and live in another European state. (Denmark isn’t included).
- Own few belongings of value.
- Have little/no equity in your home.
How Do I Apply for Bankruptcy?
You need to ‘petition for bankruptcy‘.
Making yourself bankrupt is known as ‘voluntary bankruptcy‘.
To do so, you need to complete an application form known as The Debtor’s Petition. You can find that here.
It’s important to include full details of property and possessions you own. You may face a fine or imprisonment.If you make any false statements on the form or try to hide evidence of property,
An Official Receiver from the Insolvency Service, supported by a staff of Case Examiners, will administer your bankruptcy.
Can I Be Forced to Go Bankrupt?
Your creditors can start bankruptcy proceedings against you, but to do so, you’d have to owe them at least £5,000. This is the last resort for your creditors because they have to pay the court fees for you. Most creditors only consider doing this if they’re sure you have enough assets or income to guarantee the bankruptcy will get them their money back.
Your individual debts may be less than £5,000, but collectively they could take you over the limit, and although rare, sometimes your creditors may come together to petition for your bankruptcy, to get their money back.
For your creditors to start bankruptcy proceedings against you, they give you, in person, a document known as a Statutory Demand. This is a written warning informing you that your creditor will begin bankruptcy proceedings if you don’t pay your debt or come to an agreement with them.
Once issued with the Statutory Demand, there will be 21 days before your creditor begins proceedings. This is to give you time to either settle the debt in full or come to an agreement on how you’ll pay.
In rare instances, a creditor can start proceedings without issuing you with a statutory demand:
– after you’ve had an Individual Voluntary Arrangement (IVA), which failed.
– because the creditor used bailiffs or enforcement agents to collect a debt, who discovered you own nothing of value.
Aside from the creditors having to pay the fees instead of you, If a creditor applies for your bankruptcy, the effects on you are the same as if you made yourself bankrupt.
A court hearing will take place, and if you don’t think you should be made bankrupt, you can argue your case.
Does It Cost to Apply for Bankruptcy?
To apply for voluntary bankruptcy, you must pay a total fee of £680, which you won’t get back unless you cancel the application before it goes into force. This fee comprises an adjudicator fee of £130 and a deposit of £550.
You can pay, either online or at a designated bank.
If you pay online, you can pay in instalments of as little as £5. if you pay in cash, at a bank, then you can’t pay in instalments and must pay the fee in full.
If you’re struggling to pay the fee to apply for bankruptcy, you may be able to get help from a debt charity, but it’s likely to delay your application.
To seek help with fees, look at the Turn2us website.
There may be other ongoing costs throughout your bankruptcy, which will get paid from any spare income or assets you may have (known as the ‘bankruptcy estate‘). These costs may include:
- solicitors fees
- fees of the trustee
- the cost of selling your home (estate agents’ fees, etc).
- any other bankruptcy administration costs.
If there’s not enough money or belongings of any value in your bankruptcy estate, you won’t need to pay these added costs.
If your income is high enough, you must make payments towards your debts for three years. This may come via an Income Payments Agreement or Income Payments Order. If your only income is from government benefits, you won’t get asked to pay any of this towards your debts.
What Happens Next?
With your fees paid and your application submitted, the next step is to wait for the Insolvency Service adjudicator’s decision. They have 28 days to decide. If they need further information from you, they get a further 14 days to make their decision.
Should your application for bankruptcy get rejected, you can ask for a review. If the adjudicator still rejects your application, you can make an appeal to the court. To do so, you must send the N161 form to your local court dealing with bankruptcies.
Reasons the adjudicator might reject your application include if they believe you have enough savings to resolve your debt issues or you have access to pension savings that are larger than your debts.
If your application gets accepted, the bankruptcy order gets made, and you’re declared bankrupt.
Within two weeks of the bankruptcy order being made, you’ll hear from the Official Receiver. They’ll arrange an interview with you, which can often take place over the phone.
Your money will come under the control of the Official Receiver, which may take several days to happen, but, straight after you get declared bankrupt, your bank or building society accounts get frozen with immediate effect.
It’s important not only to withdraw enough money to get by before this occurs but you must organise a way to receive money and pay bills.
Joint bank accounts get frozen too, but The Official Receiver or trustee will decide how much of the money in the account to release to the joint account holder.
The Official Receiver will oversee the administration of your bankruptcy, including having to distribute any money or property to your creditors.
You must work with the Official Receiver (or an appointed bankruptcy trustee) throughout the administration of your bankruptcy.
After your interview, the Official Receiver will inform your creditors of your bankruptcy and send them a report of your financial circumstances.
Once bankrupt, your creditors aren’t allowed to contact you to ask for payment. If they do, you should inform the Official Receiver.
Your name and details of your bankruptcy get added to the Insolvency Register, which is a national register of bankruptcies available to the public.
Sometimes you can ask that your details aren’t included (e.g. victims of violence).
As long as you co-operate with the Official Receiver or bankruptcy trustee, you’ll get discharged from your bankruptcy after 12 months.
Which Debts Can I Include in Bankruptcy?
Debts you can include in your bankruptcy include:
- benefit overpayments (unless fraudulent).
- catalogue debt
- credit card debt
- store card
- utility bill arrears
Even if you forget to list a debt in your bankruptcy application, it will still get added.
Mortgages and secured loan debts will get added to your bankruptcy if you relinquish the keys to your home (known as ‘surrendering your property’), or if your house gets repossessed.
Which Debts Can’t I Include in Bankruptcy?
Bankruptcy will write off most of your debts, but a few won’t be included:
- child maintenance arrears (if arranged by the CSA or Child Maintenance Service).
- court fines
- court orders telling you to pay compensation to someone for personal injury.
- criminal fines, compensation orders and victim surcharges from a magistrates’ court or Crown Court.
- debts you take out after your bankruptcy order.
- fraudulent debts, for example, benefit fraud.
- mortgages and other debts secured against your home if you want to keep the house.
- other secured debts, such as debts secured by a charging order.
- payments ordered by a court as part of family proceedings, for example in divorce cases.
- payments a court has ordered you to make under a confiscation order, for example, for drug trafficking.
- Social Fund loans
- student loans
- TV Licence arrears
If any of these non-included debts apply to you, you must work out how you will keep paying them. Throughout your bankruptcy period, the creditors for these debts can still contact you and take further action should you not repay them.
Are Joint Debts Included in Bankruptcy?
A joint debt is one you and somebody else applied for at the same time. It has both of your names in the credit agreement.
You can include joint debts in a bankruptcy but this will impact the other person on the credit agreement because the debt won’t get cancelled.
Although at the end of your bankruptcy period you’ll get discharged from the debt, the debt reverts to being in the other person’s name only, meaning they’re responsible for paying it.
The creditor can take action against them even if they’re unemployed. If you go bankrupt at the same time, you’ll avoid this issue.
If you do this, you’ll each need to complete separate forms and pay separate fees.
Unless you’re business partners too, you can’t apply for a joint bankruptcy and must petition for individual bankruptcy.
Is Joint Bankruptcy Possible?
Joint bankruptcy is only available for business partners as long each partner agrees.
Will I Have to Sell My Home?
If you own any assets, such as property or vehicles, the official receiver or bankruptcy trustee may order the sale of them to pay your creditors.
Apart from the basics needed for daily living and working, you may have to relinquish other possessions too.
If you’re in arrears with your mortgage payments, entering bankruptcy won’t stop your mortgage lender trying to repossess your home.
Should your home get repossessed, and the sale doesn’t bring enough money to pay off the mortgage (and any other secured debt), the remaining debt will no longer be a secured debt.
Due to this, you’ll get released from the debt when your bankruptcy period is over, even if the sale of the property occurs after your bankruptcy period has finished.
Your home can get repossessed even if it’s in joint names and whether the property is leasehold or freehold.
If you have dependants or family living in your home, you could get to delay your home from being sold for up to a year, giving you time to make new living arrangements.
Having a third party (e.g. partner, relative, or friend) agree to buy your share of your home could stop it from being sold, but they must pay the market value.
The money you’d get if you sold your share of the home, once secured debt, such as mortgages and loans gets taken off is your ‘beneficial interest‘. This isn’t the same as the legal title held by the person who owns it.
It’s usual for joint owners of the property, to share an equal beneficial interest.
If you’re the sole owner, the total value of the property minus the mortgage owed, and any debt secured on the property is your usual beneficial interest.
To sign over your share of the property or sell it for less than it’s worth, (hoping to prevent a sale) is a bankruptcy offence.
You could receive a Bankruptcy Restrictions Order, get fined, or imprisoned if the Official Receiver discovers this has occurred.
If your home’s in negative equity, you may get to keep it. If the value of your share (once sale costs get subtracted) is only £1000, you won’t need to sell. The official receiver will look at this again 27 months after the date your bankruptcy order and if your interest in the property is still less £1000, it’s unlikely you must sell your home, and the property will transfer back to you.
The Official Receiver or trustee has three years to take action on your home.
If they’ve done none of the following within three years from when your bankruptcy order began, your interest in the property will revert to you:
- applied for a court order for you and anyone else in your home to leave.
- applied to the court for a Charging Order.
- agreed that your share of beneficial interest will go to them.
- sold your beneficial interest to a third party, such as a relative.
If you’re a renter, bankruptcy is unlikely to mean you must move out, unless:
- your tenancy states that a bankrupt person can’t stay a tenant.
- a postponed Possession Order was previously in place or other grounds for possession because you’re in rent arrears or you broke your tenancy agreement in another way.
- you’ve received financial benefit from your tenancy agreement.
Going through a bankruptcy may make getting future tenancy agreements harder.
If bankruptcy puts you at risk of homelessness, contact your Local Authority to see if you’re eligible for rehousing.
Will I Have to Sell My Vehicle?
If your vehicle’s on a hire purchase or logbook loan agreement, the finance company often cancels this once you enter bankruptcy. You must return the vehicle. The outstanding debt gets included in your bankruptcy, so you won’t need to make payments. If you have permission to keep the vehicle, you’ll be liable to pay back the debt.
The above applies to other goods bought on hire purchase agreements.
Will Bankruptcy Affect my Job?
For most people, bankruptcy won’t affect their jobs and, unless your work contract states you must tell your employer you are bankrupt, you shouldn’t need to inform them.
Bankruptcy may affect specific regulated professions in which you must have a licence or be registered.
This may include roles within the following areas of industry:
- banking and financial services
- estate agents
Check with any professional body you may belong to, to find out how bankruptcy may affect your job.
Bankruptcy may mean you find it difficult to get a job in areas such as the civil service, the police force, and security firms.
For business owners, please look at this information by Citizens Advice.
Will Bankruptcy Affect My Pension?
Depending what type of pension you have and whether you’re at, or are near the age where you’re able to access any of your pension savings, your pension could get counted as an asset and get taken from you, but, you may have options protecting it.
If you receive money from a pension, your Insolvency Officer counts this as income. If this pension income provides you with more than you need to cover daily living expenses, you may get asked to contribute towards your debt.
If your only income is the State Pension and/or other benefits e.g. Pension Credits, you won’t get asked to pay towards your debts.
To stop them from getting claimed by the Insolvency Officer, you might prefer not to receive payments from your pension pot.
Due to the complexities of pension regulations, you should get expert advice on this.
You may find this resource helpful.
Other Considerations Before Applying for Bankruptcy
Until you’re discharged from bankruptcy, you must abide by restrictions. It’s a criminal offence not to follow them.
Things you won’t be able to do are:
- be a director of a company.
- borrow more than £500 without telling the lender you’re bankrupt.
- buy a council house using the ‘right to buy’ scheme
If you had to go bankrupt due to negligent or dishonest behaviour, an official receiver can extend the restrictions with a Bankruptcy Restriction Undertaking (BRU) or Order (BRO), which can last up to 15 years.
Your bankruptcy will show on your credit file for six years after your bankruptcy starts. During this time, It’s likely to be harder to get credit.
Bankruptcy affects your immigration status and means it’s unlikely that any application for British citizenship ( bringing dependents to this country) will get approved.
To find out more surrounding bankruptcy check out this comprehensive guide from Citizens Advice.
Remember, the information on my blog isn’t financial advice.
You should consult a dedicated professional when making important financial decisions.
If you find yourself overwhelmed with money worries, please seek help from any of the following organisations:
Debt Advice Resources
My hope with this series is that it helps at least one person to better understand the options for dealing with overwhelming debt and gain hope for their future.
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