Overview of bankruptcy

What is bankruptcy?

If you are an individual and you are insolvent, i.e. you have debts which you are totally unable to repay, then you may have to consider bankruptcy as an option.

If you owe more than £750 to one creditor and have consistently failed to repay the cash when asked, the decision may be taken out of your hands: the creditor can go to the court and ask that you be declared bankrupt. 

What happens if you are declared bankrupt?

If you are declared bankrupt the court takes over responsibility for repaying your debts, but you also lose control of your assets: your house may be sold to pay off your creditors, as might your car if it is worth over £2500. You will, however, be allowed to keep tools, etc. you need for your job, plus household items and clothing, bedding and furniture.

The bankruptcy order is often issued during your bankruptcy hearing at the High Court or your local county court with an income payment order. This means that any spare cash you have will have to be paid into the court for the next three years in monthly instalments towards your debts.

On the up side, you are protected from further action against you by creditors. This means they can’t take steps to contact you and recover the money you owe them or add any further interest or charges. 

How long does bankruptcy last?

Bankruptcy status usually lasts for a year, although it could be less if you are a pensioner, are on benefits, or all your debts are paid following the sale of your assets.

Restrictions

While you are bankrupt, there are a variety of restrictions placed on you such as not being allowed to obtain credit for over £250 without the permission from the lender, take out a mortgage or conduct business directly or indirectly in any name other than that in which you were made bankrupt. You are also barred from serving in the police force or military or working as a company director or in certain other professional positions such as a lawyer, magistrate, accountant or MP.  

Official Receiver

An Official Receiver is appointed by the court when you are declared bankrupt whose job it is to deal with the administration of your bankruptcy and to look into your financial affairs for the time leading up to your bankruptcy. He/she will be the one who decides how your assets will be dealt with and whether you should be required to make monthly payments into the court towards your debt via the income payment.

You must give the Official Receiver details of your financial affairs within 21 days of a bankruptcy order being made. This includes a list of your assets (such as property, pensions, insurance policies, etc.) and details of how much you owe to whom.

The Official Receiver will inform all relevant bodies about your bankruptcy including local authorities, utility suppliers, the Land Registry, etc. Bodies will also be contacted such as banks, building societies, mortgage, pension and insurance companies, landlords and anyone else that may be able to provide information about any assets or liabilities you have or have had. 

Discharge

Once the 12 months is up you will usually be discharged from bankruptcy and after this any debts which are still outstanding will be written off by the court (apart from student loans taken out after 1998, fines, and debts arising from fraud and some other crimes). You are then free to get on with your life unencumbered by debt (although if an income payment order was issued this will usually continue after your discharge for up to three years from the date of your bankruptcy order). Three years after your bankruptcy order you will also be expected to pay the court and administration fees associated with your bankruptcy.

Alternatives to bankruptcy

If your assets are worth more than £2000 and your unsecured debts are less than £20,000 the court might decide an individual voluntary arrangement is a better option in which case an insolvency practitioner will be appointed to deal with your affairs. They will sell off your assets to pay off your creditors but you won’t have the restrictions placed on you which bankruptcy brings.

Alternatively, if one or more of your creditors has a court judgment against you and if your total debts are £5,000 or less, the court could make an administration order. This means you make regular payments to the court, which will then be used to pay off your creditors. Creditors can't charge you interest or take any further action against you to get their money for the duration of the order, without asking the court first.