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Bankruptcy Explained

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In this article:

What is Bankruptcy?

Bankruptcy is a legal process that formally ends an individual’s financial liabilities with their creditors (this does not apply to Companies). You will be required to declare all your assets and these may be sold to raise funds which will be used to pay for any professional fees incurred and towards monies owed to your creditors.

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When should you consider bankruptcy?

When you are unable to service your creditors demands for payments and do not have viable means (or assets) to pay your debts then declaring Bankruptcy through the correct legal channel is possible. However, becoming bankrupt has severe consequences but it does allow you to start afresh.

Are there alternatives to bankruptcy?

Bankruptcy should only be considered once you have spoken to a professional adviser and organisations like the Citizens Advice Bureau. Bankruptcy is a last resort and other options should be considered before applying to become bankrupt such as speaking to your creditors about setting up a Debt Management Plan (DMP) or getting an IVA (Individual Voluntary Arrangement).

When can you become Bankrupt?

You can become bankrupt if you cannot pay what you owe, if your creditors apply to make you bankrupt because you owe them over £5000 or because you have broken the terms of you IVA (Individual Voluntary Arrangement). These are the only 3 reasons that a bankruptcy order can be granted.

Who decides if I am bankrupt?

It is extremely important to seek professional and impartial advice before you consider bankruptcy. If you are officially declared bankrupt this means you are unable to pay your debts – this is known as insolvency. You will need to prove that you are insolvent and your financial affairs may be scrutinised by an official receiver before and after bankruptcy is declared.

How much does it cost to become bankrupt?

It costs £680 to apply to become bankrupt. However, if you owe less than £20,000 and have no assets then you may be able to apply for a Debt Relief Order (DRO). The cost of a DRO is £90. Information on costs are available on the UK Government website – Guide to bankruptcy.

How do I apply for bankruptcy?

You can apply for bankruptcy online via the UK governments website here Applying to become bankrupt, or you can enlist the services (for a fee) of a licenced insolvency practitioner. The Insolvency Practitioners Association (IPA) website which can be found here lists its qualified members.

Someone has applied to make me bankrupt, what do I do?

If someone you owe, one of your creditors, has applied to make you bankrupt then you should immediately establish the reasons and obtain a copy of the court order or petition. You can ask a court not to make you bankrupt but you will have to prove the debt is settled or will be settled or that you do not owe the money to the applicant.

What is the process of bankruptcy?

If you choose to act for yourself then the process will be handled by an official receiver. This is a person who works for the Insolvency Service and is a representative of the court and they will become your trustee. A trustee will act as your guide through this process and has official duties & responsibilities to you and your creditors that must be adhered to.

If you engage with a competent insolvency practitioner, they will take over the role of trustee. The trustee will sell your assets, deal with official filings, coordinate communications to your creditors and keep you informed.

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What are my responsibilities once a bankruptcy order has been made?

Once an official order has been made you must –

  • Provide full and detailed information on your finances including a full list of your assets.
  • Have an interview with an official receiver with regards to your financial affairs including your debts and assets. (More information on the interview can be seen in section 4.4 here).
  • You must tell the designated trustee about any expected increase in income during your bankruptcy.
  • If someone offers you a loan of over £500 you must tell them that you are bankrupt.
  • If requested, you must attend court to explain why you owe money to your creditors.

What happens to your assets after bankruptcy?

Once you have declared bankrupt you will need to give all of your assets to the trustee. There are some exceptions such as items you need to be able to work and everyday items such as clothing and furniture. However, if your everyday items are deemed to have substantial value then they can be taken by your trustee and replaced with a cheaper alternative.

What happens to your home after bankruptcy?

Any equity, after the secured debts are settled (e.g. your mortgage) can be relinquished to pay off your creditors if there is no other way of settling the debts owed. For full details of what happens to ‘Sole owners’ or ‘Joint owners’ see section 5.1 here.

What are the benefits of bankruptcy?

By declaring yourself bankrupt you will bring a close to the stresses and uncertainty that come with extreme financial difficulty. You will no longer have to deal with your creditors as they will have to deal with your trustee. Your financial affairs will be reviewed and your creditors will be paid. This is likely to be significantly less than what you owe and once the figure has been agreed the creditors cannot change their minds nor chase you for money.

What are the negatives of bankruptcy?

Bankruptcy is a last resort as it will severely impact your financial status and credit rating for 6 years. If you choose to become bankrupt you have to accept that all of you assets that have any value, including any equity that you have in a property will/can be sold to pay your creditors. You can also lose your right to be a director of a business and any equity or stockholding in any business you are part of and will not be able to hold certain public positions.

You will have to pay for any professional person to represent you, all fees & court costs out of the value of your assets. You should be aware that all of your financial affairs will be heavily scrutinized which you are fully accountable for and that your bankruptcy will be a public record.

Summary

Bankruptcy is a possible route for a person who has significant debts, but it isn’t the only route that is available. Bankruptcies should be considered as a last resort therefore you should always contemplate other financial management strategies before choosing bankruptcies. These options include debt consolidation, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs).

You should always seek professional advice from a qualified expert.