Bankruptcy is a debt solution that is often considered a last resort for individuals in the UK struggling with unaffordable debt.
It is a formal legal process that can be entered into voluntarily or through a court order, and involves the sale of assets to pay off creditors.
While bankruptcy can provide a fresh start for those overwhelmed by debt, it is a serious decision with long-term consequences.
In this article, we will provide an overview of bankruptcy in the UK, including the criteria for filing, the process involved, and the impact it can have on your finances and credit rating.
What is bankruptcy?
Bankruptcy is a legal process for individuals who are unable to pay their debts. It is a form of insolvency in England, Wales, and Northern Ireland, while in Scotland, it is known as sequestration.
Bankruptcy involves a court order that transfers control of an individual’s assets to a trustee, who is responsible for selling the assets to pay off creditors.
After a period of time, usually one year, any remaining debts are written off, giving the individual a fresh start.
Bankruptcy comes with long-term financial consequences, however, including the potential loss of assets and long-term impact on credit rating, and should only be considered after seeking professional debt advice.
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What kind of debts can bankruptcy help me with?
Bankruptcy can help with most types of unsecured debts, including:
- Credit card debts
- Personal loans
- Payday loans
- Utility bills
- Benefits overpayments
Bankruptcy can also include certain types of secured debts, such as car loans, but typically not mortgages, so you will be expected to continue your mortgage payments throughout the process.
It’s important to note that bankruptcy cannot be used to discharge certain types of debts, such as child support or court fines.
Additionally, if you have rent arrears, these can be included in a bankruptcy, but your landlord may still take legal action to evict you.
It’s important to seek professional advice to determine if bankruptcy is the right solution for your specific financial situation.
Who is eligible to initiate bankruptcy proceedings?
To be eligible for bankruptcy in the UK, you must meet certain criteria. First, bankruptcy should only be considered as an option if your total debt level is more than the value of your assets.
Additionally, you must have no realistic way to repay what you owe, and won’t have enough spare income to consider a debt solution like Individual Voluntary Arrangements or Debt Relief Orders.
Seeking professional advice is strongly recommended to ensure that bankruptcy is the right debt solution for your specific financial situation.
How much does it cost to go bankrupt in the UK?
In the UK, there are costs associated with applying for bankruptcy. The fee to apply to become bankrupt is currently £680 and can be paid in full or in instalments.
If you are unable to afford the fee, you may be able to apply for help through a fee remission scheme.
Income Payment Agreement
It’s important to note that if you are subject to an Income Payment Agreement (IPA) after discharge, you may need to make regular payments towards your debts for up to three years.
The amount of the IPA is based on your income and necessary expenses and is determined by the Official Receiver.
How long does the bankruptcy period last?
In the UK, bankruptcy typically lasts for 12 months, after which most unsecured debts are discharged, however bankruptcy can have long-lasting consequences.
The process will have a significant impact on your credit rating. The bankruptcy will stay on your credit record for six years, making it harder to obtain credit during that time.
What happens to your assets if you’re declared bankrupt?
When you are declared bankrupt in the UK, your assets become part of what is known as the bankruptcy estate. This means that the assets are no longer under your control, and they will be used to pay off your creditors.
The assets that make up the estate can include property, vehicles, bank accounts, investments, and other valuable possessions.
The bankruptcy estate is managed by a trustee, who is appointed by the court. The trustee’s role is to sell the assets and use the funds generated to pay off your creditors as much as possible.
There are certain assets that are protected by law and cannot be sold as part of the bankruptcy estate. These include essential household items, tools of your trade, and certain pension funds.
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How do I launch my own bankruptcy petition?
The bankruptcy process in the UK generally follows these steps:
Seek free advice
If you are struggling with debt, you can seek free advice from a debt advisor or a debt charity.
They can help you explore your options and determine whether bankruptcy is the right solution for you.
Apply for bankruptcy via the Insolvency Service
If you decide to proceed with bankruptcy, you can apply through the Insolvency Service.
You will need to complete an online application and pay a fee of £680. You can also apply for help with the fee if you are unable to afford it.
Agree to bankruptcy restrictions
When you apply for bankruptcy, you will need to agree to certain restrictions.
These can include restrictions on your ability to obtain credit, act as a director of a company, or hold certain public offices.
Cooperate with official receiver
Once you have been declared bankrupt, an official receiver will be appointed to manage your bankruptcy estate.
You will need to cooperate with the official receiver (a debt professional similar to an Insolvency Practitioner) and provide information about your assets, debts, and financial affairs.
Discharge from personal bankruptcy
In most cases, you will be discharged from bankruptcy after 12 months. This means that most of your bankruptcy debts will be written off, and you can start fresh.
However, some debts may not be discharged, and the bankruptcy will stay on your credit record for six years.
What happens at the end of bankruptcy?
At the end of bankruptcy, you will receive a discharge from the bankruptcy order. This means that most of your debts will be written off, and you will be released from any further obligations to your creditors.
However, it’s important to note that some debts may not be discharged, such as court fines, student loans, and certain tax debts. Additionally, if you were subject to an Income Payment Agreement (IPA) or Income Payment Order (IPO), you may still be required to make payments towards your debts for a set period.
Once you have been discharged from bankruptcy, the bankruptcy order will be removed from the public record and your name will be removed from the Insolvency Register. However, the bankruptcy will remain on your credit record for six years, which may make it more difficult for you to do things like obtain credit or open a basic bank account during that time.
Will bankruptcy impact my credit file?
Yes, bankruptcy will have a significant impact on your credit file. The bankruptcy will be recorded on your credit file for six years from the date the bankruptcy order was made, and it will be visible to lenders and other credit reference agencies.
This means that it may be more difficult to obtain credit during this time, as lenders may view you as a higher risk borrower. Even after the bankruptcy has been removed from your credit file, it can still affect your ability to obtain credit in the future, as some lenders may ask about previous bankruptcies when considering a credit application.
In addition to being recorded on your credit file, your name and other details will also be added to the Individual Insolvency Register, which is a publicly searchable database of people who have been declared bankrupt.
Advantages and disadvantages of bankruptcy
While bankruptcy should be considered a financial last resort, it can be useful for people who have no realistic way to repay there debts. Here are some of the pros and cons of bankruptcy:
Advantages of a Bankruptcy
- Provides relief from overwhelming debts, offering a fresh financial start.
- Formal process protects assets from creditor actions during bankruptcy.
- Discharges most unsecured debts after 12 months of bankruptcy process.
- Helps end persistent creditor harassment and legal actions against you.
- Offers a structured path to financial recovery for those in crisis.
Disadvantages of a Bankruptcy
- Bankruptcy remains on your credit file for 6 years and impacts credit rating.
- Potential loss of valuable assets which could be sold to repay debts.
- Comes with restrictions on obtaining credit, being a company director, or holding office.
- Some debts may not be discharged, including court fines and student loans.
- Income Payment Agreements may require payments for up to 3 years.
Where can I get debt advice and support if I owe money to creditors?
Even if you’re facing crippling debts, declaring bankruptcy is a huge decision that shouldn’t be taken lightly. It’s important to do further research and seek debt advice before moving forward – and that’s where we can help.
Talk About Debt is a leading UK debt solution provider offering a range of services, including advice on formal debt solutions available in the UK.
Our experienced advisors can help you understand all available debt solutions and make an informed decision about your financial future. To learn more about how we can assist you in managing your debts, contact one of our advisors today.
