If debts are piling up and creditors are harassing you for payment, then declaring yourself bankrupt is one way to clear those debts and have a fresh financial start.
But declaring yourself bankruptcy is never an easy step to take. For business owners, bankruptcy can have serious, lasting consequences, so it’s not a decision to be taken lightly.
In this article, the bankruptcy specialists at Irwin Insolvency explain how to declare yourself bankrupt, and what you can gain and lose from doing so. If you’re considering declaring bankruptcy, read on as we explain everything you need to know.
How Easy Is It to Declare Bankruptcy?
Bankruptcy occurs when an individual becomes insolvent and can no longer pay their debts. It’s a legal process that must be applied for through the Insolvency Service. If approved, a state of bankruptcy usually lasts for 12 months and results in most major debts being wiped out (although often at the expense of assets, such as a home, car or business).
Declaring yourself bankrupt is a surprisingly easy process. At least, it’s easy administratively. Individuals who have become insolvent are eligible to apply through the Insolvency Service. A fee must be paid to lodge the application, and then an independent adjudicator makes a decision within 28 days. If an individual is declared bankrupt, then the process of selling off their assets in order to repay creditors begins, and can last a year
While the application process is straightforward, making the decision to go bankrupt and then dealing with the resulting and often long-lasting consequences is more challenging, particularly if you’re a business owner.
For this reason, it’s crucial that any individual facing financial difficulty approaches an insolvency advisor for expert advice before declaring themselves bankrupt. Bankruptcy should only be used as a last resort, as there are other financial alternatives that can be taken before this.
Can I Declare Myself Bankrupt?
In order to declare yourself bankrupt, you must first meet certain basic requirements. The Insolvency Service will assess these criteria independently when you apply for bankruptcy, but it’s important to understand if you qualify before lodging an application.
Individuals looking to go bankrupt have to be insolvent. This means that your outgoings must be higher than your income and higher than the value of your personal assets. On a more basic level, insolvency occurs when you can no longer pay your bills. But there’s no minimum threshold in terms of debt in order to qualify, so once you’ve recognised that you’re insolvent you can start the process of declaring bankruptcy immediately.
Bankruptcy has to be applied for online, via the Insolvency Service. The application process costs £680, which can be a sizable amount if you’re already in debt. Before you lodge your application, make sure that bankruptcy really is the best option for you. Once you’re declared bankrupt there’s no turning back, and you can lose your property, car, personal belongings and even your business. Other options – including debt consolidation loans and repayment plans – should always be considered first, so contact an insolvency practitioner for expert advice.
An independent adjudicator will assess your application for bankruptcy, and they’ll make a decision within 28 days. If they approve your application, you’ll officially be declared bankrupt, your bank accounts will be frozen, and the next stage of the process will begin.
Let’s take a step-by-step look at how to declare yourself bankruptcy once you’ve become insolvent and have decided to pursue the bankruptcy route.
- You recognise that your financial position is one of insolvency.
- You speak to an insolvency practitioner and pursue other debt management options before filing for bankruptcy.
- If bankruptcy is the best option for you, complete the online application form provided by the Insolvency Service.
- Pay £680 to lodge the application.
- Wait for the Insolvency Service to make a decision on whether or not you can declare yourself bankrupt (a decision is made within 28 days).
- If you are successful, then you have declared yourself bankrupt.
The process may be delayed if the adjudicator requests more information about your case. In the event that your application for bankruptcy is denied for any reason, then it’s also possible to appeal the decision.
What Happens If I Declare Myself Bankrupt?
Okay, so you’ve applied for bankruptcy and you hear back with confirmation that you have officially declared yourself bankrupt. Now the easy part is over, but what happens next?
Almost immediately an Official Receiver – usually a qualified insolvency practitioner – will be appointed to oversee your bankruptcy. An official bankruptcy order is issued by the courts and your bank accounts will be frozen. From this point you’re an undischarged bankrupt and you must abide by the terms of your bankruptcy order for 12 months, and sometimes longer.
At this stage, the Official Receiver will assess your debt and financial situation. The goal of bankruptcy isn’t just to clear yourself of debt, but to pay back creditors to whom you owe money. Consequently, you will now lose control of your finances and the Official Receiver will be at liberty to sell your assets in order to pay your debts. If you have an income, you may be set up on a repayment plan that sees part of your surplus income being given to creditors each month.
What you need to consider before declaring bankruptcy
It’s important to consider that the assets you lose can include your home, any other property you own, your car and any high-value personal belongings. If you own a business, this can also be sold off in order to pay your debts. For these reasons, bankruptcy should only be taken as a last resort, if you have an extreme amount of debt or if you have few assets to lose.
Declaring yourself bankrupt is also made public knowledge. For business owners, this can affect your standing in the community and your ability to do business in the future. People in a position of responsibility, such as lawyers or charity trustees, are barred from their roles.
Bankruptcy means that your debts are consolidated, and you’ll make payments over the next 12 months towards your creditors. However, the biggest appeal of declaring bankruptcy is that after 12 months, your debts are usually wiped clean. From this point on, you have the opportunity for a fresh start.
Bear in mind that not all debts can be wiped out. Common debts that are struck off after 12 months include credit card bills or bank loans, but student loan debts, parking fines or child support payments still need to be paid after your bankruptcy has ended.
Anyone declaring themselves bankrupt also needs to be aware that their credit rating will be negatively affected. Whilst bankrupt, you won’t be able to take out loans or secured credit, and the bankruptcy will be on your file for six years. That means that for the foreseeable future, it’s going to be difficult to take out loans and secure credit. If you do find a lender, you’ll inevitably be charged high interest rates and have stringent repayment terms. After six years the bankruptcy will be removed from your credit rating, but you’ll still legally have to answer truthfully if a future creditor asks if you’ve ever been bankrupt.
12 months is the standard timeframe for bankruptcy. However, in certain circumstances repayments can continue beyond one year, for as long as three years.
To help you to better understand the implications, let’s look at the positives and negatives of declaring yourself bankrupt.
Pros and cons of declaring yourself bankrupt
Here are the potential positive outcomes of declaring bankruptcy:
Pros of declaring bankruptcy
- A fresh financial start after 12 months of bankruptcy.
- Debts will be consolidated and new payment terms agreed upon with creditors.
- Major debts will be written off if unpaid after 12 months.
- Creditors can no longer harass you for payments.
- If your partner owns your home or other assets, then these cannot be sold to cover your debts.
- You can often keep essential belongings, including a car if you need it to drive to work.
- You can remain employed or self-employed while bankrupt.
- You can start a business again after 12 months and seek credit.
- In the future, bankruptcy will be struck from your personal credit rating.
Cons of declaring bankruptcy
And here are the potential negative outcomes of declaring yourself bankrupt:
- You are legally classed as an undischarged bankrupt for 12 months.
- Not all debts are wiped out after 12 months. You continue to pay for personal liabilities such as child support, student loans and more.
- All bank accounts are closed and you lose control of your personal finances to the Official Receiver.
- The Official Receiver can seize and sell assets and personal belongings owned in your name, including your home and car.
- If you rent your home, then the landlord can end the tenancy agreement.
- If you are employed, any surplus income you make can be used to pay your debts through an Income Payment Order lasting 12 months and, in some cases, up to 3 years.
- Bankruptcy is on your credit score for six years. Beyond these six years, you still legally need to reply truthfully if a potential creditor asks if you’ve ever declared yourself bankrupt.
- Sourcing credit in the future will be difficult, and you’ll be subject to higher interest rates and stricter terms and conditions.
- If you’re a business owner, your business can be taken over by a trustee and sold in order to pay your debts.
- If you’re a business owner, your employees may find themselves out of work if the business is sold or closed down.
- Bankruptcy is made public knowledge and can affect your standing in the community.
- If you’re employed in certain roles, such as a lawyer or trustee of a charity, you can be let go from your position.
There’s a lot to consider when deciding if declaring yourself bankrupt is the best move. If you owe large sums of money however, the positive effects of bankruptcy can easily outweigh the negatives. Although your credit rating will be severely affected for up to six years, you can still take out loans and start new businesses in the future.
If you aren’t hugely in debt but have lots of assets, then it’s not worth losing your home or belongings in order to pay off creditors. Instead, it may be better to consolidate loans or negotiate agreements with your creditors directly, rather than declaring bankruptcy.
Everyone’s personal and financial situations are different, so always speak to an insolvency practitioner before making a potentially life-changing decision.
How Much Does It Cost to Declare Yourself Bankrupt?
To declare yourself bankruptcy, you must pay a fee of £680 to the Insolvency Service. This is an upfront administration cost, but you will also need to factor in costs for an insolvency practitioner if you seek financial advice.
Given the potential advantages of declaring bankruptcy, these costs can help you to save large sums of money in the long term.
If you’re declaring bankruptcy, you also need to consider other costs in the long term. As well as admin fees, you can lose property and personal belongings.
How Many Times Can You Declare Bankruptcy?
There’s no limit on the number of times you can declare bankruptcy, and it’s possible to go through the process again immediately after you’ve been discharged from the first bankruptcy order.
However bankruptcy should only be used in exceptional circumstances, and it should never become a go-to financial solution. The more times you declare bankruptcy, the more difficult it will be to source credit and run a business in the future.
Contact Irwin Insolvency Today for More Information on Declaring Bankruptcy
Declaring bankruptcy can be the best way for individuals to have a financial fresh start, but bankruptcy can have severe, long-term consequences too.
To find out more about declaring bankruptcy, contact Irwin Insolvency today for your free consultation.