The word “bankruptcy” may send chills down your spine, but it shouldn’t. The stigma associated with bankruptcy doesn’t reflect reality. You may think filing for bankruptcy means you are ruined—but you should look at it as just the opposite. It is a chance for you to start over with a clean slate. Bankruptcy isn’t just an end; it is also a beginning.
Bankruptcy is a formal insolvency process which allows you to discharge many or all of your debts and get a fresh start. The process itself takes 12 months.
Bankruptcies are sometimes involuntary, but they may be voluntary as well, a decision that you make for your financial future. Bankruptcy is sometimes recommended as an alternative to an Individual Voluntary Arrangement (IVA). An IVA is a good choice if you want to protect your assets or business, but it is not an option for everyone. If your financial situation is unstable or you do not have a lot of spare income, bankruptcy may actually be the fastest way to get a fresh start.
How Does It Work?
You must apply formally for bankruptcy and pay court fees. Once you do, you will receive an information pack and may need to participate in an interview. Your situation will be reviewed in-depth, and the court will decide whether you are eligible. If you are, you will be issued a Bankruptcy order and the process will begin. At that point, your assets will be sold off to repay as many of your debts as possible. Once the 12-month period is over, you will be discharged from bankruptcy and all eligible remaining debts will be expunged. If you have any extra disposable income, you may have to continue making payments for up to two years.
What Types of Debt Can You Discharge with Bankruptcy?
Most types of debt are included in bankruptcy. That means you can expect to discharge credit card debts, personal and business loans, store card debts, and more. You can even be released from a mortgage under certain circumstances. Note that bankruptcy won’t prevent repossession.
What Types of Debt Cannot Be Discharged with Bankruptcy?
There are a few types of debt which are not automatically discharged through the bankruptcy process. These exceptions include:
- Student loans
- Court fines
- Court-ordered payments such as those owed under confiscation orders
- Maintenance payments
- Certain types of secured loans
- Tax credit overpayments
Bankruptcy Pros and Cons
Pros of Bankruptcy:
- This is a fast way to discharge the majority of your debts and finally start over with a clean slate. Most other processes, including IVAs, take significantly longer than a year and require you to make ongoing payments. Bankruptcy offers you an escape.
- Harassing calls, letters, and visits from your creditors will come to an end.
- Some essential assets will be protected through the process.
- You can qualify for bankruptcy even if you do not have a financially stable situation. Bankruptcy may be the right choice if your income swings up and down, or if you do not foresee any positive change in your situation. If you have little or nothing in the way of spare income, this is usually the best plan.
Cons of Bankruptcy:
- If you own equity in excess of £1,000, you will lose the majority of your assets through the bankruptcy process. This will more than likely include your home as well as your vehicles. In certain cases, you may be able to make an exception for a vehicle if it has a low value and you can prove it is essential to your survival (i.e. the only available transportation to a job).
- If you are self-employed, you may need to close your business down and start all over again. How much of an inconvenience this is will depend on your job. For that matter, certain occupations are not safe in case of a bankruptcy. You cannot for example hold the position of MP or company director while bankrupt. Dentists, doctors, accountants, real estate agents, financial advisors, and solicitors may find themselves unable to practice.
- Bankruptcy does still carry something of a social stigma, however unfair that stigma is.
How to Apply for Bankruptcy
If you want to apply for bankruptcy, you will need to take the following steps:
- Make your application to the court and pay the fees (usually £700, sometimes less).
- Wait for your information pack to arrive.
- Once the court mails you your information pack, you will need to provide documentation of your debts, income and assets. You will be interviewed in detail by the Official Receiver, who will determine if you are eligible.
- If the court approves your application, it will issue a Bankruptcy order.
What Happens Next?
If the court approves your bankruptcy and the order is issued, control of your assets will be given over to either the Official Receiver or an authorised Insolvency Practitioner. This person will seize and sell off your assets to repay your debts during the 12-month period of the bankruptcy. During this time, you will also be subject to restrictions. For example, you cannot borrow more than £500 without telling the creditor you are bankrupt. During this time period, you cannot hold a position such as MP (see the section on Pros and Cons above).
Once the 12-month period elapses, you will be discharged from the process and will no longer be insolvent. All non-excluded debts will be written off. If you happen to have a higher income level, you may still need to continue making payments for two more years. After that point, any remaining debts will be purged.
Frequently Asked Questions
Q: How will bankruptcy affect my credit?
A: Bankruptcy will adversely impact your credit rating and will remain on your file for six years after the process is complete.
Q: Will I lose my home?
A: If there is significant equity in your home, there is a very good chance you will lose your home through bankruptcy. However, it is unlikely that bankrupcty would be recommended unless your home would be safe, or there was no other option. Much depends on the amount of equity in your property. If the equity is negative, you may very well be able to stay in it. Generally your situation will be reviewed again two years and three months after the initial bankruptcy order is issued by the court. At that point if your equity in the home is valued at under £1,000, the court will probably transfer the house back to you.
The impact of bankruptcy on homeowners is a complex issue, and one you definitely should get professional advice on. Each individual situation carries unique concerns.
Q: Which possessions are safe?
A: Most of your valuable assets will be sold off to pay off your creditors—that includes “personal” items such as jewelry or antiques. You may however be able to hang onto a low-value vehicle if you need it for work. If you own valuable trade tools that you require for business, you will probably be able to keep those as well. Items such as bedding, clothes, children’s toys, and furniture are usually safe.
Q: Will everyone know?
A: While you shouldn’t be ashamed to declare bankruptcy, it is understandable that you want to protect your privacy. As you know, bankruptcies used to be publicised in the newspaper. Thankfully this is no longer a common practice. Your name will be entered into a public registrar, but no one will find out about it unless they are actually searching for the information. So long as you do not spread the word yourself, most people will probably not even be aware that you are bankrupt.
How to get advice on the right solution for you
As you can see, there are a lot of misconceptions surrounding bankruptcy. While you will likely lose your home through bankruptcy, it is not a guarantee. Many of your possessions will actually be protected, and you can probably even keep a car.
What is most important to know about bankruptcy is that it does not mean you are a failure. What it means is that you are finally ready to let go of the past and take your first tentative steps into a bright new tomorrow.
Still not sure whether bankruptcy is right for you, or whether an IVA or another debt solution might be a better fit for your situation? There are so many complex aspects which are important to consider—and that is why it is essential to get professional advice. You don’t have to go it alone. We are your authorised Insolvency Practitioners, and we are here to help you every step of the way. Call us at 0141 227 7788 today, and we will review your situation and help you choose and apply for the right debt solution. It’s time to live debt-free with peace of mind for your family and your future.