Your Guide to Personal Bankruptcy
If you have mounting debts and are struggling to pay your creditors, then as an individual you can consider declaring personal bankruptcy.
Personal bankruptcy is a formal legal procedure that can wipe out major debts and give you the opportunity for a fresh financial start. However, bankruptcy also results in serious personal and financial consequences, and you could lose your house, high-value assets and struggle to secure credit again in the future.
If you’re struggling financially, here’s your guide to personal bankruptcy from the expert team at Irwin Insolvency.
What Is Personal Bankruptcy?
Personal bankruptcy is a legal procedure overseen by the United Kingdom’s Insolvency Service. Bankruptcy is a response to personal insolvency, and it can be entered into either voluntarily or involuntarily. The end goal of personal bankruptcy is to remove you from debt and provide you with a fresh financial slate when the bankruptcy period has ended.
If you’ve become insolvent and no can longer pay your debts as and when they arise, you can apply to become bankrupt. This is a process that’s applied for through the Insolvency Service, and it costs £680 to do so. The only requirement is that you can prove your insolvency.
If you owe more than £5,000 to creditors, then they are within their rights to make you bankrupt through the courts. If you cannot afford the bankruptcy fee, then you can also approach your creditors and ask them to file bankruptcy proceedings against you.
It’s important to note that in the United Kingdom, bankruptcy can only be declared by individuals. Companies and businesses cannot declare bankruptcy (although they can in the United States), and they must use other insolvency measures if they are in financial distress.
Personal bankruptcy should only be used as a last resort; if you have high-value assets, it’s likely that these will be sold in order to pay your debts. A bankruptcy order stays on your credit record for years after the terms have ended, and it’s only recommended to apply for personal bankruptcy once all other personal insolvency options have been exhausted.
What Happens If I Declare Personal Bankruptcy?
The terms of any personal bankruptcy order will be different, and your case will be assessed on an individual basis by an official receiver, who is usually a licensed insolvency practitioner.
A bankruptcy order lasts for 12 months, during which time you are considered to be an ‘undischarged bankrupt’, and during which time you have to abide by the given terms or face severe penalties and legal action.
Here’s a step-by-step guide to the process:
- You become insolvent and can no longer pay your creditors.
- You file for personal bankruptcy, or if you owe more than £5,000 your creditors may file for you.
- You pay the Insolvency Service £680 and await their decision within 28 days.
- If the Insolvency Service approves your bankruptcy, then an official receiver is appointed to determine the terms of your bankruptcy order.
- A bankruptcy order is issued, you are placed on the bankruptcy register and your bankruptcy is made public knowledge.
- The official receiver takes control of your bank accounts and may begin selling assets you own to pay creditors. They may issue an income payment order, taking a percentage of your salary to pay debts.
- For 12 months you remain an ‘undischarged bankrupt’ and must abide by the terms of your bankruptcy order.
- At the end of the 12 months, you will generally be discharged from the bankruptcy order.
- Your personal bankruptcy remains on your credit score for a further six years, during which time you will struggle to secure credit.
What Are the Advantages and Disadvantages of Personal Bankruptcy?
The consequences of declaring bankruptcy will depend on your assets, and personal and financial position, but you can expect the following advantages:
- A fresh financial start (to an extent) after 12 months.
- Creditors can no longer chase you for payments.
- Major debts are consolidated and reorganised.
- New repayment terms and interest rates are negotiated.
- Major debts are written off after 12 months if they are still unpaid.
- In most cases, you can keep your job and most of your income.
- If you need your car for work, then you are often allowed to keep it.
- If major assets are owned by your partner, you won’t lose these.
- After 12 months you can start a new business and apply for new lines of credit (although this will be difficult to secure at first).
Equally, it’s important to evaluate the potential negatives when deciding whether or not to declare bankruptcy. Here are some of the disadvantages of declaring personal bankruptcy:
- For 12 months you cannot secure credit over £500.
- You lose control of your personal finances to the official receiver for 12 months.
- You may lose your car and family home (and any other high-value assets).
- Your landlord can end your tenancy agreement.
- Personal debts, such as student loans, parking fines, and child support payments are not wiped out by bankruptcy.
- You may be subject to an income payment order for up to three years.
- You will find it difficult to secure credit for at least six years.
- Even after bankruptcy is removed from your record, you must legally reply truthfully if asked by a creditor if you’ve ever been bankrupt.
- Any businesses you own may be sold to pay your debts.
- Bankruptcy is public knowledge, and if you work as a lawyer, charity trustee, or Member of Parliament, then you can lose your position.
Before declaring personal bankruptcy, it’s important to seek impartial advice from an insolvency practitioner. Bankruptcy can have serious and long-lasting implications for you, your business, and your family, and there may be other more suitable insolvency measures that can be taken first.
Contact Irwin Insolvency for More Information on Personal Bankruptcy
Irwin Insolvency has over 25 years’ experience assisting struggling individuals through the personal bankruptcy process.
Our expert team of insolvency practitioners has the experience and knowledge you need to decide if bankruptcy is the correct step forward for you.
If you need to know more about personal bankruptcy, contact Irwin Insolvency today for more information.