Bankruptcy isn’t just a big corporation’s worst nightmare. You’ve probably heard of celebrities who owed more than they could afford to pay and went bankrupt – such as Katie Price, declared bankrupt just before Christmas 2019.
Bankruptcy is a legal process by which your assets of any value are sold off to pay your creditors what you owe them. It can happen to anyone. It’s important to know what to do if you go bankrupt.
Typically, creditors will kick off bankruptcy if they believe there’s no other way to get their money back. In many cases, however, people in debt choose to start the process themselves. It’s certainly not something to take lightly. Bankruptcy can turn your life upside-down. In most cases, it’s like trying to get rid of a mouse in your house by dynamiting the place – it works, but it’ll take just about everything you own with it.
Apart from losing all of yours assets of any value, declaring bankruptcy means you can’t:
get credit for more than £500 without first telling the lender you’re bankrupt
use bank or building society accounts or credit cards
practice as a chartered accountant or lawyer
be a Justice of the Peace (JP)
become a member of Parliament
join as a member of your local council
act as a company director
form, manage or promote a limited company without the permission of the court
trade in any business under any other name unless you inform all the people affected by each transaction of your bankruptcy
You might also go through public questioning in court.
Bankruptcy is not a quick fix or “short sharp shock”. A record of your bankruptcy will show on your credit file for the next six years. That’ll make getting loans, bank accounts or mortgages difficult and expensive.
THe mark on your credit file affects more than your ability to get a credit card or loan. You won’t be able to get a mortgage for at least six years, renting a home could be difficult, and things like car finance and mobile phone contracts are unlikely to be awarded. You’ll have to live precisely within your cash means for several years.
Pros of bankruptcy
There are a few advantages:
You can get relative peace of mind, freed of overwhelming debts to make a fresh start.
In most circumstances, you’ll be automatically freed from bankruptcy (be “discharged”) after one year (although it stays on your credit report for six years)
An independent person – the official receiver – has a good look into your affairs so creditors can find out now exactly how bad things look.
How can I declare bankruptcy?
Individuals are usually made bankrupt in one of three ways:
You can petition for your own bankruptcy. If you can’t pay your bills when they fall due, you can petition for your bankruptcy. You’ll do it at the High Court if you live or carry on business in London, or in a local county court that deals with bankruptcy.
By your creditor/s. A creditor to whom you owe more than £5000 can petition for your bankruptcy. To do it, however, they need to show that you don’t appear able to pay the debt, or have no reasonable prospect of doing so. Citizens Advice Bureau (CAB) will help you learn how to deal with a bankruptcy petition.
You can be made bankrupt even if you refuse to acknowledge the process is underway or refuse to agree to it.
The best course of action is to fully co-operate once bankruptcy proceedings have begun. This will ensure the process is as painless as it can be and that you have all the information you need about what’s going on. If you need support, the Citizen’s Advice Bureau is there to help.
Once you petition for bankruptcy:
The court will appoint an official receiver who needs to find out as much as possible about what you own and what you owe.
In most cases, the official receiver will control all your finances during the application process and, if you’re made bankrupt, after that too.
The upside is that you’re then protected from your creditors who can only pursue you for money through the receiver.
Bear in mind the receiver’s job is also to look for any signs of criminal activity which could’ve led to your bankruptcy.
In a situation where you owe more than you own, the only things you can keep are some basic household items and any tools you need to work.
If you own your home, the official receiver can sell it off to go towards paying your debts. In case you have a mortgage and can’t meet the payments, the lender may repossess your home. If you’re in danger of that happening, you might want to read our piece on home repossession.
If you have any income over and above what’s necessary to live on, you’ll have to hand that over for the next year. In fact, this could possibly last for up to three years after your discharge from bankruptcy if an “Income Payments Order” is made against you.
You might have to pay part of your debts each month. That will be based on what you can afford. Read more about budgeting to learn how to cope with those payments.
For most people, bankruptcy lasts for about a year. You can get out of it if you pay all your debts and all the fees that go with being made bankrupt. Alternatively, you’ll need to prove that the bankruptcy order against you shouldn’t have been made; for instance, because you had already paid the debt in question.
But, if there’s evidence you’ve been dishonest, reckless or blameworthy, you’ll be slapped with a Bankruptcy Restriction Order. It has many of the same restrictions of bankruptcy and can last for up to 15 years.
For more detailed information about the official bankruptcy process, including the cost, try the Government’s Insolvency Service.
What happens when you declare bankruptcy?
A creditor to whom you owe more than £5000 needs to show that you do not appear able to pay the debt or have no reasonable prospect of doing so to petition for your bankruptcy. A common way for a creditor to prove this is to send you a “statutory demand”. It’s a letter with a formal demand for the sum you owe. If you don’t comply within 21 days of receiving it, the court will view that you appear unable to pay the debt.
If you honestly believe that the petitioning creditor is completely wrong and that you don’t owe them, you can resist the petition. Take legal advice if you can afford it; otherwise speak to the Citizen’s Advice Bureau. Above all, don’t be afraid to go to court personally. The courts will generally be on your side and will take the time to explain the process to you and what you should do if you want to resist the petition.
If you agree that you do owe the collector, try to reach a settlement with the petitioning creditor before the bankruptcy petition is due to be heard in court. Trying to sort it out after is difficult and expensive. If you have more than one creditor, you should consider proposing an IVA.
Is there an alternative?
Try writing to the people who you owe money to see if you can reach a compromise. Include a timetable of when you’ll repay them.
An Individual Voluntary Arrangement is a more formal way of doing the same thing. You’ll also get the help of an insolvency professional to make sure you do what you say you will. If you want to find a proper IVA practitioner (as opposed to some of the dodgy companies that have sprung up recently) contact R3 for their list.