What is Bankruptcy?
Someone who is bankrupt owns nothing of value.
Bankruptcy in the UK is a temporary state however, and once it is finished – called being discharged from bankruptcy – you have a clean financial state and are able to start again, with no creditors and no debt.
Remember Monopoly? The board game where capitalism and property investment (and, by extension, financial misfortune) are used in a way that is meant to be entertaining? While Monopoly may not be the best teaching tool for children in the world, for many it is their introduction to the word bankrupt. In Monopoly becoming bankrupt is the end of the game – you have no money left, no property assets, and you have lost.
While there are plenty of problems with Monopoly as a game, it’s introduction of bankruptcy is fairly spot on, but not just because it teaches that being out of money makes you insolvent, but also because once you have been declared bankrupt you can start a new game afresh and try again.
Its analogy is actually quite accurate!
Filing for bankruptcy isn’t just a negative thing that shows you have been unable to manage your finances (either through mismanagement or simple misfortune), it also provides a way for you to start again – that’s why people choose to go bankrupt, to clear themselves of debt and worry.
Read more: Debt Consolidation Loans
The connection between debt and mental health has been made many times by recognised authorities. In 2010, a study from the Royal College of Psychiatrists found that half of the adults in the UK at the time that had a problem level of debt were also struggling with their mental health as a consequence.
Anxiety, low moods and depression are commonly linked with debt problems and sadly the number of suicides that occur due to money issues is staggering. According to the Money and Mental Health Policy Institute in 2018, more than 100,000 people who are suffering under the crushing weight of debt attempt suicide each year.
It is a serious issue and the government have set up a number of schemes to help people with debt issues of which bankruptcy is one. It should not be seen as a social stigma or a sign of failure – bankruptcy is a tool designed to help you get back on your feet. It is often referred to as a ‘last resort’, but with suicide all too common the true last resort, perhaps bankruptcy should be better described as a ‘penultimate resort’.
Filing for bankruptcy is significant, as this article will explain, but it is a far better option than other extremes. It is legitimate and respected, and many successful people today once found themselves in a situation where they were declared bankrupt. If you are in a financial situation that has become too difficult to manage, then you may want to consider bankruptcy as a way to set things right.
Read more: What is a Debt Management Plan?
If you are struggling with depression, anxiety or other consuming worries due to your debt, seek advice. Speak with your creditors, contact the citizen’s advice bureau or a debt advisory service and get help. It’s important that you don’t suffer in silence, too – open up to family and friends.
Bankruptcy is the final stage in debt management in the UK. There are other steps in place which precede it, and if possible you should try to solve your debts using these other methods before resorting to declaring yourself bankrupt. These include:
Personal budgeting and money management
Talking to the Money Advice Service or Citizen’s Advice Bureau for free debt advice
Getting help from a debt management service with a Debt Management Plan
Legal help with an Administration Order
An Individual Voluntary Arrangement – legally binding help to make arrangements with your creditors to pay off your debts
A Debt Relief Order – dealing with your debts if you owe less than £20,000
Find out the best ways to budget in our three-part guide:
Becoming bankrupt will involve the following steps:
Applying for bankruptcy – this is done online through the gov.uk website. It costs £680 to apply and puts your case before an adjudicator who will make a decision.
Being declared bankrupt – the adjudicator will make you bankrupt and you will be sent a copy of the bankruptcy order. Your details will also be added to the Individual Insolvency Register.
Liquidation of assets – your possessions will be sold to pay your debts and your bank and other credit accounts closed.
A period of bankruptcy – until you are discharged, you will have to follow the bankruptcy restrictions (which include being unable to apply for credit)
Discharge – typically a year later, you will be released from your bankruptcy restriction and your debts will be completely cleared. A few months later, your name will be removed from the Individual Insolvency Register.
Bankruptcy on your credit file – your credit file holds the history of your financial actions for six years, so for the following six years any applications you make for credit (from a mobile phone contract to a mortgage) will have your bankruptcy accounted for. This could make it hard to obtain new credit.
Completely clear – after six years from the date of discharge, your bankruptcy will be ancient history and no longer affect you in any way.
You can personally apply for bankruptcy through the gov.uk website. The process means you will need to provide full disclosure on all of your financial status, providing wage slips, bank account statements, bills, debt collection letters and more. Essentially, you will collate together every piece of information about your financial situation to pass to the bankruptcy adjudicator.
It costs £680 to apply for bankruptcy in England and Wales (those living in Scotland or Northern Ireland have a slightly different process). You can get help paying the fee through some charities or you can arrange to pay in instalments, but the fee must be paid in full before you can submit your application.
Before declaring yourself bankrupt, it is best that you get help from a professional debt advisor.
Being forced into bankruptcy
It may be that you are forced into bankruptcy by a lender trying to recover money from you. If you owe them more than £5,000 and they know that you have property that could be sold to give it to them, or believe you are hiding assets, they may apply to make you bankrupt to force the issue.
They will have to prove to the court that they have tried all other reasonable methods for recouping their money from you, but it could lead to you being forced into bankruptcy.
If this happens to you, you should obtain legal advice.
Remember that opening definition of bankruptcy?
Someone who is bankrupt owns nothing of value.
When you declare yourself bankrupt, you will have to sell your possessions to clear as much of your debt as possible. You will be appointed a person who manages your bankruptcy (called the ‘official receiver’, ‘OR’, or ‘trustee’) and they will take control of (and sell) your assets.
You have to list all your assets as part of your bankruptcy application and will have an interview with the OR where they discuss your possessions with you in detail.
The OR will make judgements and determine what must be sold. Typically this will involve everything you own of value but they can make exceptions at their discretion.
Typically, large assets will be sold. This includes:
any land or property you own
any stocks, shares or investment in businesses
other high value machinery
If you require any of your assets for your work then you may be entitled to keep them, though if they are unreasonably extravagant then they might be sold and a replacement made. One example is with your car – if you need your vehicle for work, then that is understandable, but an expensive, top-of-the-range car would be considered a luxury and would be sold and replaced with an affordable alternative.
Valuable small assets will be sold too. Again, the caveat exists regarding items essential to your work or living, but you should declare and pass on all jewellery, collectables and other possessions of high value.
Most smaller possessions, however, are not sold during bankruptcy. The trustee is likely to ignore any items that are not easily liquidated for a reasonable sum. This means if it is worth less than £500 on the secondary market it is generally excluded. Large home cinema systems that can be quickly turned into cash may be sold, for example, but your microwave, sofa and laptop are very unlikely to be taken.
Importantly to many, engagement and wedding rings are almost never sold as part of a bankruptcy. Unless the ring is worth a truly staggering amount, most trustees would simply overlook the item and won’t question it if you do not list it on your bankruptcy application.
You will generally be stunned (and perhaps a little disappointed) at the true value of possessions on the secondary market – things are generally worth a lot less than you thought they were. Of course, in a bankruptcy this is a good thing as it means you are able to keep a lot more than you might have first believed.
Items you do not own
The OR will not liquidate anything you do not own. If your child has a room filled with expensive electronic equipment, then it’s safe from the receiver.
The OR is also careful to delineate between items you own and those that belong to your spouse or partner, so if your husband or wife owns a car that you both drive, you will still have it at your disposal after the bankruptcy.
Giving away items
Don’t try to get around the bankruptcy rules by giving away your items! The initial form will ask you to list any items given away or sold for less than their value and falsifying information will result in a Bankruptcy Restrictions Order that could make your bankruptcy far harder than it needs to be.
If you do have items you would like to keep in the family, then discuss this with the OR. They will be willing to consider your relatives and friends as potential customers when it comes to selling your possessions. So if, for example, you have a motorbike you’d like to keep, you could request that your parents be offered it first before it is sold to a wider market. They would have to pay the fair market value for it, but it could be retained by you for your use (they’d become the owners). Whether you pay them back for it at a later date is then up to them.
One question people often ask if if they are going to lose their home if they go bankrupt. If you own your home, then yes, it will be sold. If it is a joint home, then your partner could try to buy you out (if they have the affordability to apply for a larger remortgage) but generally speaking the property will be sold. Your partner will, of course, be reimbursed for their share of the property equity.
You cannot and must not try to get around this by giving away your share of the home to your partner – this is a bankruptcy offence and could have serious consequences for both of you (including prison in extreme circumstances).
Your home will not be sold without your agreement for a year if you have a partner or there are children living with you to give you time to make alternative arrangements.
If you rent your home, you will be able to keep renting it during and after bankruptcy, however if you are behind in your rent then your landlord may still apply to evict you even if the rent arrears are covered in the bankruptcy.
You will have to list all bank, building society, credit and savings accounts that you have. The OR will use any money in them to pay off your debts and freeze them, but you are entitled to living expenses, so any money needed for your daily life will be passed to you.
Having a bank account while bankrupt is possible, but there will be no credit facility on it (such as an overdraft).
Most pension schemes are not included in your bankruptcy. If your pension scheme is not an approved scheme registered with HMRC then you will need to apply to exclude it otherwise it can be used to make payments to your creditors.
If you have the ability to withdraw money from your pension then the OR may use it to pay your creditors.
Bankruptcy is a serious part of your credit record, but it is temporary and will eventually be little more than a distant memory.
During bankruptcy and straight afterwards, however, the impact can be severe.
Can I have a bank account while bankrupt?
Yes. Any bank account you do have, however, will be very basic with no overdraft facility.
Will I be able to get credit while bankrupt?
You may not borrow money over £500 while bankrupt, and most creditors will reject you entirely until the bankruptcy has been discharged.
Can I get services while bankrupt?
Services such as broadband and mobile phones are not considered essential and providers will reject you for a contract until after the discharge.
Water, gas and electricity suppliers have a duty to provide a supply if requested, so you will be able to get these services, though they may put in a prepay meter to limit their liability.
How long does bankruptcy last?
Your bankruptcy discharge is usually 12 months after the date of bankruptcy. After this time, you are free to apply for credit as normal, however companies will see your bankruptcy on your credit history and make their decisions with that in mind.
Realistically, this means you will be very limited in the credit you can get, though it will be available.
Will my credit return to normal after discharge?
Credit cards specifically for people with bad credit are available to you from the moment of discharge. These will typically have a higher rate of interest and need a good level of money management from you, but can help you build your new credit rating.
Similarly, loans from specialist lenders who deal with poor credit situations and even bankrupt mortgage specialists do exist! Typically, they will require a certain level of additional security (in the case of mortgages this is usually seen through the requirement for a far higher deposit – as much as 25%) but nothing is completely impossible.
In practice, patience is key. The more months and years distance you place between you and your bankruptcy, the more lenders are willing to look seriously at your application. As time passes, you will get access to better deals.
How long does bankruptcy stay on your credit report?
Your credit history looks back over six years of activity. With a bankruptcy, this means it will affect you for seven years – a year before the discharge, and then six years before the discharge itself is no longer listed.
Realistically, creditors and lending companies tend to dismiss bankruptcy as a concern after four to five years have passed – especially if the intervening years show strong credit history.
It’s very important that you not slip back into the problem. Going bankrupt to clear debt in the UK is a way to wipe out your old issues and start anew – future creditors expect to see that you have learned from the past and your money management is significantly improved for the experience.
Your post-bankruptcy credit report should be a shining beacon of perfection! There is really no reason why it shouldn’t be.
At Compare UK Quotes we have a large library of useful articles to help you stay on top of your personal finances. Planning and budgeting skills are not always easily learned, but the help is there!
Use tools such as the multi-agency credit report available from Check My File and keep a vigilant eye on your financial profile.
Almost perversely, a person with an ageing bankruptcy on their credit file who shows strong money management skills is subsequently more likely to pass credit checks and loan applications than someone who has never had the experience!
Is filing for bankruptcy bad? No. It is worth it? In the right circumstances, definitely.
In the past bankruptcy has been seen as a social stigma, but in modern times it is better understood as a tool that must sometimes be applied. Many people have been bankrupt and recovered successfully – the president of the United States has declared his businesses bankrupt six times (or four, depending on who you believe)!
If you have reached the end of your ability to handle your debts, then maybe bankruptcy is the right move. It’s important you do not make the decision alone and without advice however, and there are many free debt advice services worth speaking to before you make the application.