What happens when you become bankrupt?
If you have debt problems, you may be thinking about bankruptcy. It's important to understand what bankruptcy is, and what alternatives exist. Bankruptcy isn't permanent, so you may choose it as a way of clearing your debts and making a fresh start.
What is bankruptcy?
Bankruptcy is a legal status that usually lasts for a year (see 'How long does bankruptcy last' below) and can be a way of clearing debts you can't pay.
When you're bankrupt, your non-essential assets (property and possessions) and excess income are used to pay off your creditors (those you owe money to).
At the end of the bankruptcy period, most debts are 'discharged' (cancelled).
How do you become bankrupt?
A court can declare you bankrupt by issuing a 'bankruptcy order' after it's been presented with a 'bankruptcy petition'.
Filing your own bankruptcy petition
A form (a debtor's petition) can be downloaded from the Insolvency Service website or obtained from county courts with bankruptcy jurisdiction.
When completed the form should be taken to the county court nearest to you that has bankruptcy jurisdiction. A fee of 150 is payable, although this can be waived if you meet specific criteria, when you file the petition.
A deposit of 360, for the Official Receiver's work, is also payable at this time. This amount cannot be waived.
A creditor making you bankrupt
Your creditors can present a creditor's petition if you owe them an unsecured debt of over 750.
Once bankruptcy proceedings have started, you must co-operate fully even if it's a creditor's petition and you dispute their claim. If possible you should try to reach a settlement before the petition's due to be heard - doing it later can be difficult and expensive.
Alternatives to bankruptcy
Bankruptcy is a serious matter - you'll have to give up possessions of value and the interest in your home. However, you don't have to become bankrupt just because you're in debt. You can try to make arrangements with your creditors instead - including:
- informal agreements - you write to your creditors and try to agree a repayment timetable that you can afford, with the support of a personal budget
- a debt management plan - you make one payment each month to a company that sends the payments to your creditors for you; you can get a free debt management plan, so get advice first
- individual voluntary arrangements (IVAs) - an insolvency practitioner helps you negotiate repayment terms
- administration orders - a county court orders you to make payments to the court, which the court then distributes among your creditors for you (but you must owe under 5,000 in total and have at least one County Court Judgment)
- debt relief order (DRO) - your debts could be written off after 12 months if you owe under 15,000, have assets worth below 300 and have spare income of below 50 a month
Where is a bankruptcy order made?
Bankruptcy petitions are usually presented in the High Court in London or at a county court near where you live or trade (although not all deal with bankruptcy petitions).
Who deals with your bankruptcy?
An Official Receiver is appointed to protect your assets. They act as trustee of your bankruptcy affairs if you have no assets.
If you do have assets, an Insolvency Practitioner will be appointed to act as trustee and sell your assets to pay your creditors.
Once a bankruptcy order has been made against you, your creditors can no longer pursue you for payment. Payment becomes the responsibility of the trustee.
How bankruptcy affects you
Once you're bankrupt, the Official Receiver, or appointed trustee, can sell your assets to pay your creditors. However, certain goods aren't treated as assets for this purpose, for example:
- equipment you need for your work (like tools or vehicles)
- household items needed by you and your family (like clothing, bedding and furniture)
If you own your home, you may have to sell the property. This will depend on who owns the property, the value of the home, and whether the property is worth more than your mortgage. This is called equity.
It may be possible for the joint owner or family and friends to make an offer to the official receiver to buy out your share of the equity. This is particularly helpful if there is little or no equity.
The Official Receiver can look at your income (taking into account expenses such as your mortgage, rent and household bills) and decide if payments should be made to your creditors.
You may be asked to sign an 'income payments agreement' to pay fixed monthly instalments from your income for three years.
If you don't pay (or if you don't sign the agreement voluntarily), the Official Receiver can apply for an income payments order from the court to order you to pay. This will run for at least three years from the date of the order.
If your circumstances change, you'll need to tell the Official Receiver, so they can review these arrangements.
You'll still have to meet ongoing commitments such as rent or debts incurred after you become bankrupt.
Your obligations when you're bankrupt
- give the Official Receiver details of your finances, assets and creditors
- look after your assets and hand them over to the Official Receiver with the relevant paperwork, such as bank statements and insurance policies
- tell your trustee (either the Official Receiver or insolvency practitioner) about any new assets or income during your bankruptcy
- stop using credit cards and bank or building society accounts
- not obtain credit over 500 without telling the creditor that you're bankrupt
- not make payments direct to your creditors (there are exceptions to this, such as mortgage arrears and outstanding child support payments)
You may be able to open a basic bank account once you are bankrupt.
- Help with PDF files
Even after the bankruptcy period, you may find it difficult to obtain credit. The bankruptcy order will be registered with credit reference agencies for at least six years, and even after this time you may be asked whether you have ever been bankrupt before when applying for some credit, particularly a mortgage.
Details of your bankruptcy are also kept on the Individual Insolvency Register for three months after the date of your discharge from bankruptcy.
How long does bankruptcy last?
Bankruptcy normally lasts for one year. After this time, you'll be 'discharged' from your bankruptcy regardless of how much you still owe.
Your discharge could happen earlier if you co-operate fully with the Official Receiver. However, in a small number of cases and if you've behaved irresponsibly (for example, by not co-operating), bankruptcy can last for much more than one year.
More useful links
- National Debtline DRO factsheet
- Read more about IVAs from National Debtline
- Free debt advice and information from National Debtline
- Find out more about bankruptcy from The Insolvency Service
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