Before lockdown, card payments were already becoming the norm in high-street retailers and local shops alike. But the sudden closure of physical retailers and the need for stringent hygiene measures due to the pandemic has hastened the decline of cash payments. Not only are more consumers paying for things online than ever before, but card […]
Bankruptcy in the UK explained – what you need to know
Bankruptcy is a bit of a dirty word in the UK, and can conjure up all kinds of unpleasant associations such as assets being seized, businesses failing and homes being repossessed. But while bankruptcy is a serious move that has lasting consequences, and shouldn’t be taken lightly, it’s far from the horror story that some people think it is. In fact, it could actually be the best way out of a difficult situation for many families and business owners. So what is bankruptcy, how does it work and when should and shouldn’t you seek it? Let’s take a look at the basics.
What is bankruptcy?
While bankruptcy has all kinds of negative connotations, becoming bankrupt is actually supposed to be for the benefit of the person who is declaring themselves bankrupt. In law, bankruptcy is a means of reliving the debtor of their responsibility for the debts they hold, allowing them to set up alternative means for paying off the debt and writing off some or all of the debt in some cases. Having said that, bankruptcy is not a ‘get out of jail free’ card, a bankrupt person will be expected to comply with the conditions of their bankruptcy, and may be required to sell off all but a few exempt assets in order to pay their debts. This can include houses, cars, objects of value, businesses and other property. In exchange full cooperation with these conditions, a person can be declared entirely debt free after the bankruptcy period is over, usually a period of one year.
How does bankruptcy happen?
There are two major methods of declaring bankruptcy: One is self initiated, the other is initiated by other parties looking to reclaim some of their money. Declaring yourself bankrupt is actually surprisingly easy, and there is a government portal online to help you do it. In order to process your bankruptcy you must provide a range of information about yourself and your finances, primarily your assets, income, outgoings and your debts: Bills, wage slips, property, loans, credit cards, store cards, stocks and shares, savings etc. This allows the agency to fully assess your situation and create a workable plan that will see you through to the end, and hopefully set you on the right course to a debt-free future. There is also a fee of £680 to pay in order to have your application processed, though it is possible to pay this fee in instalments if you don’t have the cash to hand there and then.
While most bankruptcies are self assessed, it is possible to have other people or organisations apply to have you made bankrupt by law. They might do this if they believe that you are unable to pay the debt that you have with them, and would like to reclaim their money by having your assets legally liquidated. In this case your situation will be looked at by an impartial adjudicator, who will decide whether to take your case further. If this happens, you will be served with a bankruptcy order and you’ll have to go through the same processes that a self declaration would have you undertake, though if you’re unsure about any of these steps then it’s best to get in touch with a debt advisor who can help you. It’s also worth noting that these facts only apply to England and Wales, and Northern Ireland and Scotland have their own versions of bankruptcy which work differently.
The next steps
One of the major benefits of the bankruptcy process is that, once you start, it places a rigid structure on the process of dealing with your debt. Many people find that bankruptcy, however challenging, is a more comforting position to be in because it stops the endless cycle of chasing by creditors and short term, stopgap measures to pay off debt in favour of a rigid and well moderated system. This system begins as soon as you have been declared bankrupt and a receiver has been appointed to oversee your case, and the immediate changes you’ll notice are a number of restrictions that will be placed on your ability to do business. For a start, you won’t be able to work in a position of responsibility over money until the bankruptcy process has been seen through, including running, managing or promoting a company, advising on debt, forming a business or being appointed as a company director. You’ll also be unable to borrow more than £500. It is worth noting, though, that these restrictions are at the court’s discretion, so looser restrictions can be negotiated depending on your situation.
At this point in proceedings, you’ll also find yourself working with the courts and your receiver to deal with your affairs and your assets. As indicated earlier, during the process of bankruptcy it can be necessary to liquidate any existing assets, and that job falls to the receiver and insolvency practitioners. They will have the joint responsibility of both protecting and disposing of your assets, which can be unsettling but also liberating for people who have been burdened by problem debt for a long time. On the plus side, your route out of bankruptcy is now laid out for you, and you can check things like your discharge date from the insolvency register online. For the rest of the bankruptcy proceedings, you will then be updated on what is being done to help resolve your case, which debts are being written off and which are being settled through the disposal of assets.
Is bankruptcy the right option for me?
As we’ve already identified, bankruptcy is a serious decision that shouldn’t be taken lightly, and it’s a good idea to check if you have any other options such as an Individual Voluntary Agreement or a Debt Relief Order before you take the plunge. Whilst these options are also forms of insolvency that will hurt your credit rating, they’re not quite as severe as bankruptcy and offer similar benefits in terms of restructured debt payments. As always with any major financial decision it’s a good idea to get professional advice before you make any decisions, and you can always get advice from charities or free debt advice organisations if need them. Bankruptcy will remain on your credit file for as much as six years after you file, and you will almost certainly find it difficult to raise finance during that time, or to rent or apply for jobs that involve responsibility over money. You may also be required to continue paying money towards your creditors after the formal bankruptcy period is over, using a system known as an income payment agreement (IPA).
What happens after bankruptcy?
Bankruptcy is designed to free you from debt, and most people will end up leaving bankruptcy with little to no debt. You’ll be cleared of Credit cards utility arrears, store cards, overdrafts, catalogues, benefit overpayments and any other unsecured debts, though you’ll still be liable for certain other debts like child maintenance, criminal fines, student loans, mortgages or debts incurred after your bankruptcy took effect. Depending on the circumstances behind your bankruptcy at the point you are discharged you are usually free from any more payments or restrictions, however if you are bankrupt as a result of fraudulent activity you could be held by those same restrictions for up to 15 years afterwards.
Advantages of declaring bankruptcy
So, all in all, what are the advantages of declaring yourself bankrupt and why should you do it? Well, the biggest benefit is that you get to start from scratch once the bankruptcy period is over. For many people, this is the first chance they get to live normally and start building towards a future again after many years of problem debt, which is an opportunity that it’s hard to put a price on. As long as everything goes well and you have no outstanding orders to pay, this can be achieved in as little as a year, which is a great attraction to many people.
One of the most pressing concerns that bankruptcy frees its users from is the attentions of creditors, who may have been pursuing them for months or years before hand. This means that the demand notices will stop, but also the bailiffs and debt collectors that may also have been holding them back, so all of that pressure is relieved. It also means that any expensive proceedings through small claims or other courts that may have been looming large on the horizon will be stopped too, potentially saving a lot of money and trouble.
A further benefit of bankruptcy, as opposed to other forms of debt relief, is that it is a system designed to get you back up on your feet again after you’re finished with it. This means that you could be able to keep assets you require to live, such as possessions and income for living expenses, and maybe even your house and car. Rather than being a punishment, bankruptcy is supposed to be a way of helping people out of debt whilst also helping creditors get as much money back as possible, so for people in serious debt it can be the safest way to go. Other forms of debt relief that aren’t so structured can see people lose everything, or hobbled for many years with significant debt burdens that don’t allow them a fresh start.
Disadvantages of bankruptcy
While bankruptcy can be a safe and stable way to settle debts and get out of trouble, there are still some serious drawbacks that should make you think long and hard about your options. In the longer term, the biggest problem that you will find with bankruptcy is the damage that it will do to your credit score. While all forms of debt relief are harmful to your credit, bankruptcy will mean that it can be almost impossible to get credit of any kind, so loans and credit agreements will be out of reach for up to six years. Not only that, but any credit you can access will be charged at a much larger rate of interest than you may be used to, as you will be considered to be a high risk customer. While it might be expected that loans would be harder to come by, this also applies to other forms of finance such as hire purchase agreements and phone contracts, so you’ll be forced to settle for what you can buy outright in terms of phones and cars. It may also be difficult to get things like store cards.
A second and clear disadvantage is that the process of bankruptcy takes a lot of the direction out of your hands, and places it in the hands of the person appointed to oversee your bankruptcy. While they will try to accommodate your wishes in handling your assets, they may be forced to dispose of things like your house, car or business in order to reach agreements with creditors. While this usually results in you coming out of your bankruptcy debt free, it can result in some unpleasant decisions being made, including the use of your saved pension to pay back your debts. It will also sometimes hold you back in your personal or professional life, as people with bankruptcies on their credit reports are usually banned from holding positions with responsibility for money. This means you can’t be a director or even a senior manager, can’t start a business or even act as a treasurer at your parish council or bowls club. Unless you successfully appeal against it, your name will also be published in a list of people who are insolvent, which may open you up to discrimination socially or even intimidation or harassment from your former creditors.
While bankruptcy is a serious turn of events that can have consequences for your finances and credit score, it’s far from the death sentence many people portray it as. Done right, it can even be the safest and cleanest way out of debt for many families and businesses.