Declaring Bankruptcy – Is It a Good Decision?
Personal insolvencies have hit a six-year high, with 28,951 people entering an insolvency solution in the second quarter of 2018 – 14% of which were bankruptcies.
If you’re considering declaring bankruptcy it may seem as though you’re stood on a cliff edge, uncertain as to what the future holds for you. While it might feel as though you’re the only person to have faced this, in fact you’re among a growing number of debtors who are taking this drastic step to address their financial issues. Nevertheless, declaring bankruptcy must involve thorough research as to whether this decision is right for you. Let’s explore exactly what declaring bankruptcy involves.
Declaring Bankruptcy – An Overview
Bankruptcy is a process that shares your assets amongst your creditors, allowing you to start afresh free from the burden of debt.
Declaring bankruptcy is a serious and final form of debt solution that should only be considered once you’ve thoroughly researched and explored all your other debt solution options. There may well be other forms of debt solutions suitable to your circumstances (start your research with our debt solution page).
Declaring bankruptcy will write off most of your unsecured debts, while your creditors will be legally obliged to cease all court action once you’ve filed.
There are some restrictions that you’ll need to abide by.
After declaring bankruptcy you won’t be able to:
- Borrow more than £500 without informing the lender you’re bankrupt
- Become or act as a director of a company without the permission of the court
- Create, manage or promote a company without the court’s permission
- Manage a business with a different name without informing people you do business with that you’re bankrupt
- Work as an insolvency practitioner
Declaring Bankruptcy – Your Responsibilities
When declaring bankruptcy there are some legal requirements that you must abide by. You must:
- Provide the official receiver information on your finances
- Provide a complete list of your assets
- Inform your trustee about any increase in income during your bankruptcy
- Inform anyone who offers to loan you over £500 that you’re bankrupt
- Attend court to explain why you owe money if asked to do so
- Work with those who are managing your bankruptcy
You must not break these bankruptcy restrictions. Should you do so, you may be prosecuted.
The Disadvantages of Declaring Bankruptcy
There are serious considerations to be paid to declaring bankruptcy, these include:
- Declaring bankruptcy can’t wipe out all debts, such as: student loans, secured debts, child support, ex-spouse legal fees and credit card debt, legal compensation, and income tax liability.
- Your name and details will be published on the publicly-accessible Individual Insolvency Register.
- Depending upon the terms of your contract, bankruptcy debt could affect your job.
- If you own assets (including property, a vehicle or items of high value) you should expect them to be sold at auction.
- After declaring bankruptcy your credit rating will be seriously affected for up to six years, during which time you’ll find it challenging, if not impossible, to obtain credit.
- Declaring bankruptcy could also affect your business and personal pension.
Declaring bankruptcy – The Process
Prior to Declaring Bankruptcy
Before declaring bankruptcy, you must seek impartial, expert advice. Start with your local Citizens Advice Bureau (you can find your closest Citizens Advice branch via their online search tool).
Applying for bankruptcy costs £680 and is completed online via the Gov.Uk website. This fee is made up of:
- An adjudicator fee of £130
- A deposit of £550
If you’re unable to raise this fee, you may be able to apply for a grant from various charities and trusts. Use this tool from the Turn2us charity to find out what you could apply for.
Alternatively, you can choose to pay by instalments. The minimum amount per instalment is £5 and you can opt to pay in as many instalments as you wish.
If your creditors have applied to make you bankrupt you won’t have to pay this fee.
Additional Bankruptcy Costs
- Professional fees for solicitors
- Expenses for any professionals you have used, such as trustees
- any other administrative costs of your bankruptcy
- Costs associated with selling your home, such as estate agents’ and legal fees.
Note: If your estate doesn’t have enough money/belongings of value to cover these costs, you won’t have to pay them.
After Declaring bankruptcy – What to Expect
- You’ll receive a copy of the bankruptcy order and may be interviewed about your situation
- Your assets can be used to repay your debts
- You’ll have to follow the bankruptcy restrictions to the letter
- Your name and details will be published in the Individual Insolvency Register
Following six years your bankruptcy will be ‘discharged’ and you’ll be able to rebuild your credit history. To learn more about the steps you can take to repair your credit read our guide: Dealing with your debt problems – A step-by-step
Declaring Bankruptcy – Are you Eligible?
In order to qualify for bankruptcy, you must meet this criteria:
- You must owe at least
- You’re unable to repay your debts over a reasonable amount of time
Key Question – Have you Fully Researched Your Options?
Declaring bankruptcy is the most serious form of debt solution and is not to be entered into lightly. Before deciding that bankruptcy is right for you, you should explore other potential debt solutions.
Is an IVA an Alternative to Declaring Bankruptcy?
Individual Voluntary Arrangements (or IVAs for short) are official, legally binding arrangements made with your creditors. An IVA will allow you to repay your debts over a set period of time, at a rate you can genuinely afford. They are overseen by an IVA Provider, who will help you analyse through your income and expenditure to work out how much you could repay following your essential outgoings.
An IVA can tackle common debts, including: overdrafts, personal loans, catalogue debts, council tax arrears, hire purchase debts, mortgage shortfalls, credit and store cards, and money owed to HMRC (e.g. income tax or National Insurance contributions).
IVAs must be agreed by both the court and your creditors and are suited to those who owe a minimum of £5,000.
An IVA may be a better alternative to bankruptcy if you:
- Own property or other assets that you don’t want to lose
- Own a business
- Might lose your job – for example, if you are a police officer or work in finance
- Currently have, or are considering applying for, a power of attorney
- Have spare income each month and/or a lump sum of money to make repayments to your creditors
- Want to avoid the social stigma
Advantages of an IVA compared to declaring bankruptcy
IVAs may allow you to pay back only part of your debt
An IVA runs for either 60 or 72 months (five or six years), after which time any remaining debt will be written off.
IVAs are more flexible
An IVA offers more flexibility as compared to declaring bankruptcy. They allow you to keep your property and assets, rather than them being used to pay your creditors.
An IVA may allow you to keep your bank accounts
Declaring bankruptcy usually means that your bank accounts are closed. In which case you will need to apply for a basic bank account.