What happens when you declare bankruptcy?If your debts have become unmanageable and you are unable to make even minimum repayments on what you owe, then you may be considering bankruptcy. Of course, before you take on this solution you should also look into alternative options – such as an Individual Voluntary Arrangement or Debt Management Plan.
This solution isn’t one that will impact you and your credit rating forever and so it may be an effective way of clearing your debts and giving yourself a fresh start. However, it’s important you understand what happens when you declare bankruptcy and to prepare accordingly.
Your finances will be investigated
There are several steps involved when applying for bankruptcy – we’ve explored these further in this in-depth guide – but the process is relatively straightforward.
Once you have paid the £680 fee and your application has been received it’s simply a case of waiting for approval. This fee is broken down into two payments – one is an adjudicator fee of £130 and the other a deposit of £550. These can be paid in instalments if needed.
Someone called an Official Receiver has 28 days to decide whether to grant you a bankruptcy order. During this time they will look closely at your finances and may ask for further information from you – it’s important you comply with all their requests to ensure the process runs smoothly.
Your income is also carefully considered and if the Official Receiver believes you earn enough that you should be making some form of payment to the creditors you owe money to, they may ask you to sign an income payments agreement (IPA).
What is an income payments agreement?
It is a formal agreement between you and the Official Receiver. It usually involves you making a monthly repayment – normally a minimum of £20 – over three years.
You will only be asked to sign an IPA if you have £20 or more disposable income after your essential expenses have come out. When it comes to expenses that are considered essential, the following would usually be included:
- Rent or mortgage repayments
- Utility bills
- TV license
- Insurance – house and car insurance (if the official receiver has said you can keep your vehicle)
- Breakdown cover
- Child maintenance payments
- Broadband and telephone
You won’t have to deal with creditors
Once your bankruptcy has been approved, your creditors will no longer be able to make contact with you to chase you for payment. For many people, this is a great weight off their mind. The Official Receiver will deal with your creditors for you and arrange how their debts will be paid or written off – debts are repaid using your assets, such as your home or a high-value vehicle. We have explained this further in the section below.
You may lose your home
To pay off a large portion of your debts, you may be required to sell your property to release any equity. This will mean that you will lose your home, so it’s important to find alternative housing as soon as possible – whether that means staying with a friend or relative or speaking to your local authority about re-homing schemes.
Can you stop your home from being sold?
In some cases, it is possible to prevent your home from being sold while bankruptcy is being carried out, but this is a case by case situation and is not guaranteed. Here are some situations which may mean you can hold onto your property:
If someone can buy your share
If your partner or a relative can buy your share of your property, then you may be able to stop your home from being sold. The share they can buy is called your beneficial interest, which is the amount of money (minus the mortgage or any secured loans) that you have a stake in, on the property.
You cannot simply sign over your share of your home to prevent it from being sold. This is a bankruptcy offence and if you are found guilty you could have your bankruptcy restrictions lengthened, you could also be fined or sent to prison. We have more information about bankruptcy offences here, it’s a good idea to be aware of these to ensure you don’t fall into trouble.
If you have dependents living with you
If you can prove that family or dependents live with you then this may give you some extra time – usually an extra year – to sort out their living arrangements. It won’t prevent the sale of your home completely but ensures you can have everything in place and that people you care for are provided for.
If no action has been taken against your home
The Official Receiver has three years to request for your home to be sold. If your home isn’t sold within this time or any action has been taken against it then it will become yours again.
If the Official Receiver hasn’t done any of the following:
- applied for a charging order
- sold your beneficial interest to your partner, relative or friend
- applied for an order that you and those living in your home should leave the property
then your home will effectively become yours again. It’s a rare occurrence, but something to be aware of.
Renting and bankruptcy
Your bankruptcy shouldn’t affect your rented property, so you can continue to live in it if you can make the rental payments on time and in full.
However, you will need to check your contract to see if there is a clause that means you must notify your landlord or you cannot remain in the property, if you have taken on bankruptcy.
If this is not the case, then your current landlord will only find out about your bankruptcy if they perform a credit check on you or search for you on the insolvency register. If your tenancy agreement is already in place and automatically renews, then you should be able to continue living there without issue.
Any other assets you have are also sold
As well as your home, any considerable assets are also sold to make repayments to your creditors. This means items of worth, such as your car, will need to be added to the bankruptcy to be sold.
If you own your vehicle, you may only be able to keep hold of it if it’s considered essential to your day to day life or if it’s worth very little.
What isn’t considered an asset?
Anything you need to comfortably live is not considered an asset, so this includes:
- White goods
- Equipment you need for work
Your bank accounts may be frozen
Once your bankruptcy application is submitted, you may find that your bank accounts are frozen, often for a period of between 2-7 days.
This is because the Official Receiver needs to investigate all of your finances and so you cannot use them during this time. They will contact your bank first, who will immediately close the account.
You will need to hand over all of your bank cards and credit cards for accounts that you don’t use. They will also look into releasing money that you need urgently to cover everyday costs such as food and household bills.
What if you have a joint bank account?
In most cases, the bank will close the account and then refund half of the money to your partner or the other named person. They may also remove your name on the account and turn it into a sole one for the other person.
Can you open a new bank account?
You can, but your options may be limited and you should only open a basic bank account – not a current account. If you do open a new account before your bankruptcy – to use for your income and bill payments – it’s worth noting that even this will be frozen for a short period of 2-7 days while your finances are investigated.
You will have restrictions placed on you for 12 months
Once your bankruptcy is approved and being carried out, you will have certain restrictions placed upon you, which can affect how you do things financially. These include being unable to apply for credit of £500 or more, or acting as a director of a company without the approval of the Court. These restrictions will only last for 12 months.
Your bankruptcy will be listed publicly
Both the Insolvency Register and the London Gazette – a financial newspaper – will feature details of your bankruptcy. Since 2009 bankruptcies can no longer be listed in local newspapers.
You’ll need to be aware of and meet certain obligations
It’s important you provide your Official Receiver with everything they need but there are other obligations you must meet too. These include:
- abiding by all bankruptcy restrictions placed upon you
- not making payments directly to your creditors
- looking after your assets and handing them over – as well as providing all the relevant paperwork to go with them
- telling the official receiver about any new assets or windfalls you receive during the bankruptcy process.
When you declare bankruptcy, your life will undoubtedly change but at the end of the 12 months, when you are discharged, you may be free of debt/restrictions and able to rebuild your life.
Bankruptcy remains on your credit report for six years, from the date it was created, which means your ability to obtain credit will be affected – simply because declaring bankruptcy severely impacts your credit rating and you will be considered a high risk by creditors. But you are effectively debt free and able to make a fresh start.