Bankruptcy basics

If the demands from credit companies are piling up on your doorstep, then you may be considering filing for bankruptcy.

Bankruptcy no longer carries the stigma that it once had, although it will be published in local papers, on the internet and on local authority notice boards so that creditors have a chance of coming forward to claim their money. It is something that should not be rushed into, because it has long-lasting effects.

It is really only suitable for people in extreme circumstances, with severe debt problems.

What is bankruptcy?

Bankruptcy means you no longer have to worry about the money you owe to your creditors, and you can make a fresh start once the bankruptcy order is over. Debts that you can’t pay will be written off.

That’s the good news. The downside is that many of your possessions will be sold to pay off your creditors, and you will be forbidden from certain occupations (probably the best known of these is that undischarged bankrupts can’t stand for Parliament).

An official known as the Official Receiver takes control of your money and assets, and deals with your creditors. Your bank accounts will be frozen. You will be allowed to keep certain things, such as household goods. If you own your own home, then this will usually have to be sold to pay off your creditors. Your car and any luxury items you own will be sold. Your business will be closed down.

Some of your debts (including court fees and student loans) will not be written off.

It costs money to be declared bankrupt—you will have to pay court fees in the region of hundreds of pounds.

You should resist any temptation to hide assets from the Official Receiver—this is a criminal offence and you could be sent to prison.

What effect does it have?

When you are declared bankrupt, all of your assets can be sold to pay your creditors. This means property, shares and any other belongings that you have. Where a person has few assets and large debts, bankruptcy may be a viable option. If the person owns assets, however, then it should only be used as a last resort.

Giving away or selling your property prior to bankruptcy does not necessarily protect the bankrupt, because the trustee has the power to investigate any gifts or sales made in the previous five years, and claim back the gift from the recipient.

Undischarged bankrupts must declare their status when arranging credit of more than £500, and commit a criminal offence if they fail to do this. This makes it difficult for undischarged bankrupts to run a business, and they need special leave from a court if they want to become a company director.

Undischarged bankrupts are forbidden from certain jobs, including MP, company director, councillor, magistrate, estate agent. It is unusual for them to be allowed to become school or college governors and they may be restricted from serving on the management committees of charities.

It may be difficult for people who’ve been declared bankrupt in the past to become solicitors, accountants, certain types of civil servant, or to work in a security firm. This is because they need to show they can manage financial affairs responsibly for these jobs.

Moving home is more difficult as a bankrupt because your ability to raise money through loans and mortgages is limited. 

Long-lasting effects

Bankruptcy usually lasts one year, after which you are free of your debts.

However, there can be long-lasting effects. Even after you have been discharged, you can have what is known as a ‘bankruptcy restrictions order’ made against you. These can last for 15 years and seriously hamper your financial affairs.

You should also consider how bankruptcy will damage your reputation.

Scotland and Northern Ireland

The law regarding bankruptcy is broadly similar throughout the UK.

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