If an individual is facing personal financial difficulties, they have the option of declaring bankruptcy.
Bankruptcy can offer individuals a fresh financial start, but there are a number of long-lasting consequences that need to be considered first.
In this article, the team at Irwin Insolvency answer the common question – what is bankruptcy? – explaining the bankruptcy process and what it means for an individual to become bankrupt.
Here’s everything you need to know about bankruptcy.
How to Go Bankrupt
Individuals who are no longer able to pay their debts are eligible to go bankrupt. This is a formal, legal procedure overseen by the UK’s Insolvency Service; it’s a procedure that can only be applied to individuals who have become insolvent.
It’s important to note that businesses and corporations in financial distress cannot apply for bankruptcy in the UK, but must go through other insolvency processes instead.
To go bankrupt, an individual must owe money to creditors. There are two ways an individual can become bankrupt in the UK.
If you can no longer pay your debts and recognise that you have become insolvent, you can voluntarily apply for personal bankruptcy, a procedure that must be applied for online.
In order to apply for bankruptcy, you must pay a fee of £680 to lodge the application. Once the application has been lodged, your financial position is reviewed by the UK’s Insolvency Service and an independent adjudicator decides whether or not you qualify to become bankrupt.
However, if an individual owes £5,000 or more to creditors, those creditors are entitled to apply for bankruptcy on that individual’s behalf via the courts. This could be with the individual’s consent – if they can’t afford the bankruptcy fee, for example – or, more commonly, as a last resort by creditors to reclaim money owed.
Therefore, going bankrupt can be either voluntary or involuntary. Either way, there are positives and negatives to bankruptcy, as well as long-term financial consequences that must be taken into consideration. Before choosing to go bankrupt, Irwin Insolvency always recommends speaking to a professional insolvency advisor, as there are options that can be taken before this.
What Happens If You Are Declared Bankrupt?
What is bankruptcy and what happens if you’re declared bankrupt?
The exact terms of a bankruptcy order vary from one individual to the next, as conditions are determined by the amount owed, the value of the assets owned by the individual, and their current employment status.
Once you’ve been legally declared bankrupt, you’re essentially cleared of your major debts and provided with the opportunity for a fresh financial start. However, a debt-free life isn’t the only caveat that comes with declaring bankruptcy. Your major assets can be sold off, you still have to pay for certain personal liabilities, and your credit score is negatively affected for years to come.
Let’s take a detailed look at what happens when you’re declared bankrupt:
- Major debts and liabilities can be written off.
- Creditors can no longer chase you for payments.
- You continue to pay for personal liabilities such as child support, student loans and outstanding fines.
- Assets – including your house and car – can be sold to repay debts if they’re deemed non-essential.
- If you rent from a landlord, your lease may be terminated.
- All your bank accounts are closed down, and everything is consolidated into one bank account.
- You have no control over your finances.
- Any business you own can be sold or closed down to pay debts.
- If you’re employed, an Income Payment Order can be issued to repay creditors.
- You are classed as an undischarged bankrupt for a minimum term of 12 months.
- Bankruptcy remains on your credit score for six years.
- Personal bankruptcy is made public and you are excluded from certain roles in society, such as practising law or being elected as a Member of Parliament.
If you’re declared bankrupt then you agree to abide by the terms of the bankruptcy order issued by the court. Failure to meet the requirements of the order can have severe, legal repercussions and could result in bankruptcy orders being extended.
How Much Do You Need to Owe to Go Bankrupt?
When discussing what is bankruptcy, it’s important to understand at what point you can become bankrupt, either voluntarily or forcibly.
If an individual is voluntarily applying for bankruptcy, they can do so when they have become insolvent. Insolvency occurs when a person has more money going out of their accounts than coming in, and they are consequently no longer able to pay their debts.
The situation is different if creditors are attempting to force a person into bankruptcy to reclaim a debt owed to them. For creditors to apply for bankruptcy on behalf of an individual, that person must owe £5,000 or more. The total amount owed can be to a single creditor, or the £5,000 debt can be split between multiple creditors. If an individual owes less than this amount, then creditors must find other ways to recoup their money.
If you have debts that you’re struggling to pay, this doesn’t automatically mean you should apply for bankruptcy yourself. There are other ways to pay back creditors – through repayment schemes or consolidation loans, for example – before bankruptcy should be voluntarily entered into.
How Long Are You Declared Bankrupt?
A bankruptcy order generally lasts for 12 months, but this can vary depending on individual circumstances. During this 12-month period, you’re legally termed to be an undischarged bankrupt and must abide by the rules of your bankruptcy order.
After the initial 12-month bankruptcy period, you may be legally discharged from the bankruptcy order. At this point, your major debts will have been wiped out, creditors will no longer be chasing you, and you have the opportunity to start again – although you may have lost your business, house and car in the process.
The longest that a bankruptcy period can last is three years, however it’s rare for a bankruptcy period to be extended for this length of time. Once your bankruptcy order has ended you’re removed from the bankruptcy register, but it continues to remain on your credit score for six years.
While you technically have a fresh start, the reality is that you will struggle to find credit for the next six years. If you find a lender willing to loan money, then interest rates will be high and repayment terms strict. After six years, the bankruptcy order no longer appears on your credit score. However, you will still have to disclose the fact that you were previously bankrupt if directly asked this question by a lender in the future.
Therefore, the effects of bankruptcy can continue to linger long after the order has expired.
What Happens When You File for Bankruptcy?
If you’re personally filing for bankruptcy, you must do so online through the Insolvency Service. After you have paid the £680 fee, an adjudicator investigates your case and a decision will be made within 28 days.
If you are declared bankrupt, then a bankruptcy order is issued against you. Your bank accounts will be closed and an Official Receiver – usually a licensed insolvency practitioner – is appointed to determine and oversee the terms of your bankruptcy.
At this point, the Official Receiver will investigate your personal financial situation, with the goal being to pay back creditors where possible. What happens next can vary from one individual to the next.
If you have assets, such as an expensive car or a house, then these can be sold in order to pay your debts. However, if your partner owns the home or can buy out your share of the property, then it’s possible to save the house. If you’re employed and need the car to drive to work every day, you may be allowed to keep a vehicle, too.
If you have any excess income from your employment, then you may be assigned an Income Payment Order. This orders you to pay a percentage of your income each month to creditors, and is calculated based on any surplus money you have after essentials – such as rent and food – are accounted for.
If you own a business, it could be sold off in order to pay your creditors, leaving any staff you employ potentially without a job. If you rent, your landlord is within their rights to end the tenancy. If you’re employed in a position of responsibility within society, then public bankruptcy can not only be embarrassing, but it can bar you from public or charitable work.
Even if you’ve successfully filed for bankruptcy, it’s important to consider that not all of your debts will simply be wiped clean. While bankruptcy orders can wipe out large debts such as bank loans or mortgages, many personal debts remain and you must continue to pay these off. Personal debts include any outstanding student loan repayments, any family related payments – such as child support – and fines issued by local councils or courts.
As you can see, filing for bankruptcy can have severe repercussions and it’s a decision that shouldn’t be taken lightly or in order to clear minor debts. However, if you have large debts or few assets to lose, then declaring bankruptcy is an effective way to clear those debts and gain new opportunities in the future.
What Is the Process of Declaring Bankruptcy?
By now you should have a good understanding of what bankruptcy is, so let’s summarise the process of declaring bankruptcy in an easy, step-by-step format.
Here’s a breakdown of the bankruptcy process:
- An individual becomes insolvent and can no longer pay their bills.
- The individual files for bankruptcy online with the Insolvency Service, paying £680.
- Alternatively, when an individual owes £5,000 or more creditors apply for bankruptcy on their behalf.
- The Insolvency Service investigates the case for bankruptcy and notifies the individual of their decision within 28 days.
- If the individual qualifies for bankruptcy, an Official Receiver is appointed to determine the bankruptcy terms.
- A bankruptcy order is issued, the individual placed on the bankruptcy register, and their bankruptcy is made public.
- The Official Receiver takes control of the individual’s bank accounts and begins selling assets. An Income Payment Order may be issued.
- The individual remains an undischarged bankrupt for a period of 12 months, during which time they must abide by the terms of their bankruptcy order.
- After 12 months, the individual is generally discharged from their bankruptcy order.
- After 6 years, the bankruptcy is removed from their credit rating.
How Long Does the Bankruptcy Process Take?
Once you’ve applied for bankruptcy online with the Insolvency Service or a creditor has applied on your behalf, a decision will be made within 28 days.
The adjudicator appointed by the Insolvency Service will contact you within this timeframe to inform you whether or not the courts will issue a bankruptcy order against you. Once the order has been issued it generally lasts for 12 months, but you may find yourself paying off debts for up to three years depending on your circumstances.
It’s important to remember that while the actual bankruptcy process generally takes no longer than a year, the consequences can last much longer than this. You could lose personal possessions and your credit rating will be negatively affected for up to six years. Even beyond this point, you’re legally required to declare that you were bankrupt if asked, and this can severely affect your ability to apply for credit 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 there are other insolvency measures that should always be considered first.
Bankruptcy can have severe, long-term consequences, and it’s recommended to seek the advice of an experienced insolvency practitioner before filing for bankruptcy.
To find out more about declaring bankruptcy, contact Irwin Insolvency today for your free consultation.