What is Bankruptcy?
Bankruptcy is a form of insolvency which allows you to deal with debts you can no longer manage. It is most suitable for those with minimal assets and who cannot make minimum payments towards creditors.
Out of all the debt solutions available, Bankruptcy has long held a certain stigma and this stigma has often prevented people from opting for bankruptcy. However, in some circumstances it is the most appropriate solution and should be considered.
Traditionally, an application for bankruptcy would be submitted through the courts. However, from the 6th April 2016 applications are now submitted online and do not involve the courts. This is something that you can do easily yourself, but there are charities and free-to-client debt solution providers who can assist you if needed. Alternatively, we can help you petition for your bankruptcy.
The fee charged for going bankrupt is £680. This fee consists of a £130 adjudicator fee, and a £550 bankruptcy deposit.
Creditors can also petition for your bankruptcy but only if your debt exceeds £5,000. This has recently been increased from £750. The fee a creditor has to pay to petition for your bankruptcy includes the petition deposit of £990, the court fee of £280 plus their solicitor’s legal fees which could increase the total to £2,770. The increase in the minimum level of debt is likely to result in the number of petitions by creditors reducing. Instead creditors are more likely to pursue the judgment route to secure debt payments either by instructing bailiffs to uplift your goods, Income Payments Orders or Charging Orders. Please read our blog on County Court Judgments for more information on this process.
If your unsecured debts are less than £20,000, you don’t own a home, have savings and have assets worth less than £1,000 and you have £50 or less left over each month after you have settled household expenses, a Debt Relief Order (DRO) might be a more suitable option for you. The cost of a DRO is much less than bankruptcy at only £90.
Is a Bankruptcy suitable for me?
Bankruptcy can provide a fresh start especially if you cannot afford to make monthly contributions to your unsecured creditors and you minimal assets. Your household possessions and certain “tools of trade” are excluded from bankruptcy. You will get your discharge 12 months after the date of your bankruptcy order (unless you do not co-operate with your Trustee as your discharge can be suspended).
A Trustee in Bankruptcy has the responsibility to turn the assets covered by your bankruptcy into cash. This could take several years especially if you have a property with equity. So even though you get your discharge after 12 months, the tasks of the Trustee will continue. This will include agreeing for you to make monthly contributions for a period of 3 years if you surplus funds after taking into account your reasonable costs of living.
A Trustee can also require that you downgrade assets. For example if you have a car which you can prove is essential to help you earn a living or is needed to help look after a relative, and the value of the car is considered to be excessive, (generally more than £3,000) the Trustee can require you buy a cheaper alternative and pay the difference into your bankruptcy.
Bankruptcy only covers unsecured debt such as credit cards, loans, arrears of council tax and utilities, revenue debt including overpaid tax credits and shortfalls on properties that have been sold. Certain debts are not covered by Bankruptcy including matrimonial debts, student loans and court or criminal fines.
There are other solutions including IVA’s, Debt Relief Orders, Bankruptcy and Dealing Directly with your Creditors which may be appropriate. If you live in Scotland, the solutions are different, please visit Scottish Debt Solutions.
How will Bankruptcy affect me?
Bankruptcy can have an impact on your life for a long period and generally people entering Bankruptcy will be subject to the following limitations during the period of the Bankruptcy order.
- Assets you own which are not excluded from bankruptcy will have to be sold and the funds paid into your bankruptcy. This includes any equity you own in a property or your car where the value is above £1,000 and your car is not classified as a tool of trade.
- Surplus income after taking into account your reasonable costs of living has to be paid to your Trustee for a period of 3 years. This continues even though you get your discharge as explained below.
- You are automatically discharged from bankruptcy 12 months after the bankruptcy order. The automatic discharge can be suspended if you fail to co-operate with your Trustee. The discharge does not stop your Trustee from dealing with your assets and collecting monthly income contributions.
- You will be unable to act as a director of a company or be involved in running a company without a courts permission
- Bankruptcy could prevent you from working in particular industries particularly financial services which are regulated. For certain professionals including solicitors and barristers, there is a risk that if made bankrupt you could face action against you called Bankruptcy Restriction Order which if made against you could result in restrictions in your ability to continue in practice.
- Your details will be on a searchable register, Individual Insolvency Register for a period of 6 years and this is likely to prevent you from accessing credit. You will be unable to get credit of £500.00 or more without telling the lender that you are a bankrupt
- You will be unable to get credit of £500.00 or more without telling the lender that you are a bankrupt
Please visit Bankruptcy the Process for more detailed information on the process and effect of Bankruptcy.
Help with preparing your petition
There are sources of free debt advice and services. You can find out more by contacting the Money Advice Service on https://www.moneyadviceservice.org.uk/en/articles/where-to-go-to-get-free-debt-advice or 0300 500 5000 (8-8 Monday to Friday, 9-1 on Saturday).