Any individual in England, Wales or Northern Ireland who is struggling to repay their debts can choose to apply for bankruptcy, but this option should always be considered alongside all other available debt solutions.
There are also some situations where a creditor can petition for a debtor to be declared bankrupt, if the debtor owes them at least £5,000 in unsecured debts – bankruptcy is slightly different in Northern Ireland and a creditor can petition if you owe them over £750 in unsecured debts.
If you’re worried about missed payments – or other financial difficulties – and you or your creditors are considering making you bankrupt, contact PayPlan today for quick, FREE professional debt advice on bankruptcy and the full range of other debt solutions which might be available to you.
What is bankruptcy?
Bankruptcy is a debt solution for those who are insolvent, which means that they cannot pay their creditors when their bills are due, or that their total debts are bigger than the value of their assets.
When declaring yourself bankrupt, you are stating that you are unable to pay off your outstanding debts, and you pass the responsibility for your debt repayments to a trustee, who will either be an Official Receiver or an Insolvency Practitioner.
Any person in England, Wales or Northern Ireland who is struggling to pay off their debts can choose to apply for bankruptcy, but this option should always be considered alongside other available debt solutions. Those in Scotland would apply for Sequestration, the Scottish equivalent of bankruptcy.
It is usually a last resort as it typically involves the trustee selling some of your assets, which may include your house and car if they are deemed of excessive value. For example if you owned a very expensive house or vehicle, you may be expected to downgrade these in order to repay as much of your debts as possible.
Bankruptcy usually lasts for a year, after which time the debts within the bankruptcy will be written off. You may be required to make payments from your earnings into the bankruptcy for up to three years by way of an income payments arrangement, but only if you had more than £20 a month of surplus income. If your only income is state benefits, you would not be required to make these payments.
What are the alternatives to bankruptcy?
If you can’t repay your debts and think you are likely to go bankrupt, you may still qualify for a number of other debt solutions that could help you to avoid the serious consequences of bankruptcy, including:
- Individual Voluntary Arrangement (IVA) – this is a debt solution that allows you to keep ownership of your assets, whilst making reduced and affordable debt repayments for a specified period (generally 5-6 years) – after which time your outstanding debts are written off. It is legally binding on both you and your creditors.
- Debt Management Plan (DMP) – this is a less formal way of repaying your debts in which you make reduced payments to your creditors based on what you can afford after your living costs (and any priority payments) have been taken care of. The DMP lasts until you have repaid your debts in full, or until your circumstances improve. Bear in mind that as this is an informal arrangement, your creditors don’t have to accept it, and can still take legal action against you to recover what you owe them
- Debt Relief Order (DRO) – this is similar to bankruptcy but for those who have assets worth less than £1,000 or have a surplus of less than £50 per month. A DRO lasts for one year and after that period your debts will be written off.
When you contact PayPlan we will discuss all of your options with you and recommend the most suitable solution. You can contact us by calling our free phone number 0800 280 2816 or by requesting a call back using our debt help form.
Who can be made bankrupt?
Bankruptcy is for residents of England, Northern Ireland and Wales – Scottish residents should look at the Scottish equivalent – Sequestration.
If you are struggling to pay your creditors and your debts are getting out of hand you you can apply for a bankruptcy order – but there is an upfront application cost associated of £680 (costs slightly differ for Northern Ireland residents – find out more here.) Anyone can apply for bankruptcy providing you can afford it.
If you miss multiple payments to your creditors, they can apply for your bankruptcy. If you are in an IVA but you fail to meet the agreed conditions, in this instance your IP can also file for your bankruptcy.
In the past Bankruptcy has always carried a stigma with it, it has always been thought of as a big no no, or not something that should be done easily. However over recent years, with more and more people experiencing problems with debt, it has become more acceptable for someone to become bankrupt.
What is the process of being made bankrupt?
Step 1 – the application
The first step to becoming bankrupt is to apply for your bankruptcy. England and Wales residents can only apply online – you can access the application by clicking here. Residents of Northern Ireland will need to apply through the courts – you can pick up the relevant forms you will need to start your application from the High Court in Belfast or from the Insolvency Service.
If someone else applies for your bankruptcy you will receive a copy of the petition – you can request the court doesn’t proceed with your bankruptcy but you will need to guarantee the debt will be paid. Some people request that they apply for an IVA instead so they can protect their assets.
Step 2 – the bankruptcy order.
An Official Receiver will take control of your bankruptcy. They will talk to you about your finances and your assets and look at how you can make some contributions towards your debts. You must co-operate with the official receiver and give them any information they require.
The official receiver will take over control of your assets and they may sell them to repay your outstanding debts. He will then decide how the money is distributed to you creditors and will use some of the funds for the administration process.
You will be allowed to keep everyday household items and anything you may require for work but property and vehicles could be sold as part of the order.
The trustee may also request you make income payments towards your debts if you can afford to do so – if you are reliant on state benefits normally you won’t be asked to make income payments.
You will be discharged from the bankruptcy order after 12 months but if you made an income payment arrangement with your trustee, you will need to carry on making payments towards.
You can find a detailed explanation of the bankruptcy process by visiting the government website.
How will bankruptcy affect me?
If you are declared bankrupt, you are no longer liable for any outstanding debts documented in the bankruptcy proceedings. This can give you peace of mind and alleviate stress. Your assets will be shared out between your creditors, and you can make a ‘fresh start’.
However, this doesn’t come without its repercussions.
Read on for more information about the advantages and disadvantages of bankruptcy.
What are the advantages of bankruptcy?
- If you have no funds with which to repay your debts – or if other debt solutions are likely to take you many years to complete – bankruptcy might be a suitable option
- Bankruptcy usually lasts for just a year leaving you to make a fresh start
- Most of your debts will be written off when you are discharged from bankruptcy
- The Official Receiver deals with your creditors on your behalf
- Creditors can’t take further action against you unless the debts are secured on your home or property
- You’ll still be allowed to keep essential items needed to satisfy basic domestic needs and for work providing they are not of excessive value.
Read more here: Are you eligible for bankruptcy?
What are the disadvantages of bankruptcy?
- Once you are made bankrupt you are no longer in control of your assets. An Official Receiver will be appointed to go through your finances, assets and debts, and investigate the cause of your bankruptcy. Your assets will be vested in the Trustee in Bankruptcy.
- If you have valuable assets – such as a house (or other property), motor vehicle(s), jewellery or any other household items deemed to be of excessive value – these are likely to be sold in order to pay your creditors. The funds raised from sale will go firstly towards the fees and costs of your bankruptcy, with your creditors receiving the balanceIf you have a surplus income of £20.00 or greater per month, you may be expected to pay this surplus into the bankruptcy for up to three years.
- Certain professionals are barred from practicing if they are made bankrupt. Other occupations and professions, such as the Police Force, Armed Forces, Local Council and Government Offices may also be affected so ensure you check any contracts.
- Bankruptcy will have a serious impact on your credit rating for 6 years from the date the bankruptcy order is made
- If you run a business it will almost certainly be closed down and any employees you have may need to be dismissed.
- You will be committing an offence if you obtain credit of £500 or more without disclosing that you are bankrupt
- You cannot act as a director of a company without the court’s permission
- You cannot create, manage or promote a company without the court’s permission
- You cannot manage a business with a different name without telling people you do business with that you’re bankrupt
- Any member of your family – or even your employer – could be publicly examined in court if the Official Receiver believes this will aid the investigation.
- Once a bankruptcy order has been made, the Official Receiver will give written notice of the order to a number of organisations. This will include the order being advertised in the London Gazette (an official publication containing legal notices) and possibly your local newspaper.
- Your details are also displayed on the Individual Insolvency Register (accessible on the Insolvency Service website) until three months after you are discharged.
- Any pension payments received during your bankruptcy will be classed as income and may create a surplus to be paid into the estate under an Income Payment Order/Agreement. Depending on your specific circumstances, you may be able to continue to make payments to your personal pension, although this is unlikely. If you draw down your pension (as a lump sum) while undischarged bankrupt you would be expected to pay it into the bankruptcy.
- Bankruptcy doesn’t just affect you. If you have joint debts you are both joint and severally liable, so creditors will look to your partner to payany joint debts in full that were included in your bankruptcy. Details of your bankruptcy will be held by the credit reference agencies and if debts are linked on your credit files, your bankruptcy may affect your partner’s credit score. He/she may also be affected by the action taken by the Trustee in respect of your interest in your home.
- You will remain liable to pay certain debts – in particular:
- Student loans
- Debts arising from family proceedings; and
- budgeting loans and crisis loans owed to the Social Fund
Contact PayPlan today
If you have debt problems and are looking for a suitable debt solution for your own financial and personal situation, contact PayPlan today for quick, FREE professional debt advice.