Bankruptcy is a form of insolvency that involves the transfer of all your assets to a trustee, who sells them to raise money for your creditors. A bankruptcy order generally lasts for 12 months after which time any remaining debts are written off.
What is bankruptcy?
Bankruptcy is a formal insolvency procedure whereby unsecured debt is repaid as far as possible using funds from the sale of your assets. Any residual debt is written off and you become debt-free when your obligations under the bankruptcy order have been met.
Bankruptcy typically lasts for 12 months, but can last longer if you are required to make monthly contributions from your earnings. It is often seen as a last resort when all other options have been exhausted.
Once you have been declared bankrupt, your creditors are no longer legally able to contact you. Bankruptcy can affect several areas of your life, however, and you will need professional guidance to establish whether this is the best option available.
Who can apply for bankruptcy?
You can apply for bankruptcy if you live in England, Wales, or Ireland, and are unable to repay a significant level of unsecured debt. You must pay a fee of around £700 to declare yourself bankrupt – this can be paid in instalments, but your application will not go through until it is paid in full.
If you live in Scotland you need to follow the Scottish bankruptcy procedure called sequestration, as the laws of insolvency are different from those in England, Wales, and Ireland.
The bankruptcy process
The bankruptcy process begins when you submit an application to the Insolvency Service, and this can be done online. Once your application has been accepted you will be invited for an interview with the Official Receiver, where you will be required to hand over your financial records for inspection.
The interviewer will establish the circumstances that led to your financial decline, and examine your bank statements and other financial documentation. If a bankruptcy order is made, the majority of your assets then transfer to a trustee.
Your assets are sold to generate a financial return for creditors, and if you are a homeowner, this could include your property if there is sufficient equity available to make a sale worthwhile.
The trustee may also request that you sign an Income Payments Agreement (IPA) if you earn a regular income. This means that any surplus income from your wages will be used to provide a higher return for creditors over a period of several years.
If you do not agree with this arrangement, the court can impose an Income Payments Order (IPO), which enforces the trustee’s decision. You will be subject to many other restrictions during the 12-month bankruptcy period, and potentially beyond this time if you do not co-operate with the trustee.
You should be able to retain certain assets if they are essential for your work, and also some household goods, but you will lose much financial freedom when you enter bankruptcy, and it is likely that your bank accounts will be frozen.
How long does bankruptcy last?
A bankruptcy order generally lasts for 12 months, but it can be longer if you do not co-operate with the trustee. Examples of non-compliance include failing to disclose your assets or income in full, not informing the trustee if you receive a lump sum of cash, or attempting to borrow more than £500 without declaring to the lender that you are bankrupt.
An Income Payments Agreement or Income Payments Order generally last for three years, so you will still continue to make repayments under the arrangement after you have been discharged.
- Your creditors are not allowed to contact you
- Any remaining debts are written off and you can start afresh
- You may be able to retain some assets, such as household belongings and items that are essential for work
- Creditors are generally unable to take court action against you
- Bankruptcy lasts for a relatively short period of time when compared with other debt solutions, such as an IVA
- You need to pay an upfront fee of around £700
- You may lose your home
- Bankruptcy remains on your credit file for six years, and can adversely affect your ability to borrow for much longer
- Your job may be at risk if your employer does not allow employees to become insolvent
- If you earn a regular income, you may have to make further contributions for several years
- If you are at pension age, some or all of your pension pot may be used to repay creditors
- You may need to close down your business if you are a sole trader or company director
- Your bankruptcy is included in a publicly viewable register
Bankruptcy vs IVA
Bankruptcy may be a better option than IVA if you are not a property owner, do not own high-value assets, or earn a high income. It allows you to escape your debt sooner, but can affect many areas of your life over the long-term.
Both bankruptcy and IVA officially write off residual debt, and therefore offer protection from creditors when the process comes to an end. Your home is a major issue when you are deciding between bankruptcy or IVA, however, and will be influential in dictating the best option.
For more independent guidance and information on bankruptcy and other debt solutions, call our experts at UK Debt. We offer free initial consultations, and will ensure you understand all your options.