If you are thinking of going bankrupt, there will probably be a lot of things that you want to ask. For most people the thought of bankruptcy is just scary so this page looks at the major concerns almost everyone has about how bankruptcy will affect their lives.
Bankruptcy – a quick overview
- Bankruptcy writes off almost all of your debts.
- From April 2016, you apply to go bankrupt online – you don’t have to go to court any more.
- When you go bankrupt, the Official Receiver (OR) will decide if any of your assets will be sold – most people do not lose any assets.
- The OR will make an Income Payments Agreement for three years if you have sufficient surplus income – most people do not have to make any monthly payments.
- You will normally be discharged from bankruptcy after a year. After you are discharged there are no further restrictions on your actions, but you will find it harder and more expensive to get credit.
- This Bankruptcy Timeline gives an overview of what happens and when.
- If you owe less than £20,000 see if a Debt Relief Order (DRO) is suitable as it’s simpler and cheaper.
Will I be allowed to go bankrupt?
Yes! People often worry that they will be told they can’t go bankrupt as they should just pay off their debts. When you make a bankruptcy application, this has to be approved by the Insolvency Service’s Adjudicator, who will look at various technical matters, including whether you are “insolvent”. If you have taken advice from a good debt adviser and have been told that bankruptcy is a good option for you, then your bankruptcy is going to be approved.
What about my job?
There are some jobs which you cannot do as a bankrupt eg MP, company director. In some professions – solicitors, accountants, financial advisers – you may be prohibited by your professional body from practising whilst bankrupt, although it may be possible to find a similar role for which you do not technically need to have the relevant professional qualification.
If you are in the police, need a security check or you must inform your employer if you go bankrupt (this includes some jobs with banks), you might assume you will lose your job. However, the important thing for this sort of job is normally that they don’t like employing people with large financial problems because of concerns about fraud or blackmail. By going bankrupt you are getting rid of your debts and by telling your HR department you are eliminating the chance of blackmail. So have a discussion with your HR department in confidence as it is possible that you will not lose your job.
Lots of people worry unnecessarily about their job and bankruptcy. Unless you work in one of the areas mentioned above it is extremely unlikely that you will have any employment problems. Ask yourself if you have ever been asked if you are bankrupt when applying for a job? If the answer is no, your employer probably doesn’t care.
You are allowed to be self-employed as a bankrupt, but your existing business will be closed down and you will have to start to trade again. If you are a decorator and you just have the tools of your trade this won’t be a problem. If you employ other people and have a lease on a building, this gets more complex and you should take professional advice, contact Business Debtline.
I’m renting – will bankruptcy affect this ?
There may be a clause in your Tenancy Agreement which allows your landlord to end it if you are made bankrupt. If you live in council or housing association property, it is extremely unlikely that you will lose your home. If you are renting privately, your landlord is highly likely to want to keep you as a tenant – after all, if you have managed to keep paying the rent so far despite your other debts! It is a rare landlord who would prefer to get rid of a good tenant and have to look for a new one.
Renting somewhere new when you are bankrupt can be difficult because you will fail any credit check. However your credit rating may already br very poor so this may not make much difference. There are four ways around this sort of problem: find somewhere to rent privately, not through a letting agent, as landlords can apply commonsense to your situation whereas letting agents normally have no discretion; get a guarantor; have a very large deposit; or delay your bankruptcy until after you have moved.
I’m buying – what happens to my mortgage and my house?
If you carry on paying your mortgage and secured loans they do not form part of your bankruptcy (well legally they do, but your lenders will not repossess the property if you carry on paying, so it will feel as though bankruptcy hasn’t changed your secured debts). If you have handed back the keys to the lender or you have been evicted by the lender, then the loans are included in your bankruptcy and any shortfall after the property is sold will not be a debt you have to deal with.
If your house is worth more than the amount owed on any mortgage plus secured loan, then there is equity in the property and the OR will want to sell it. If you only own part of the house, the OR cannot take the equity that belongs to your partner, but can still force a sale of the house. So if you cannot arrange for someone to buy your equity (see below) then you are going to lose your home and you should explore the alternatives of a DMP and an IVA in detail before deciding that bankruptcy is preferable. Even if you are resigned to losing your home, you may find that it is preferable to sell it yourself and opt for an IVA including an up-front lump sum from the sale of your house.
If your family are living with you, then you are usually given 12 months before any sale can take place, which will give you time to make other living arrangements. If you have children or a disability, having your house sold by the OR means that your local council will be obliged to re-house you when you are made homeless, but if you prefer to rent privately you will be allowed to save up a deposit for renting.
You can avoid losing your home if it is possible to sell your equity to a relative or a friend. If you own your home jointly, the sale of your equity can be to your partner, providing they are not also going bankrupt. If there is no equity in the property a relative or friend can buy your interest for a nominal sum from the OR (although there will be costs of several hundred pounds).
It can be reasonably argued to the OR that a lower value on the house should be acceptable because of the need to sell the property relatively quickly and because lower sales costs are incurred (no estate agents or solicitors). Think of all the problems with your property – for example it needs a new roof, the boiler is 20 years old – as these can all reduce the amount of money needed to purchase your equity. You can also argue that your share of the equity is less than 50% if, say, your partner provided more than half of the deposit for the house, or if your partner has paid for large improvements such as installing central heating or building a conservatory.
If your name is not on the deeds of your house so that you are not its legal owner, the OR may still decide that you have a beneficial interest in the property. There is therefore no point in trying to transfer your half of your house to your partner (or anyone else) before you go bankrupt to avoid losing it.
If you have never owned any part of the property, the OR may still decide you have some beneficial interest in the property if you have contributed towards the deposit for the mortgage, if you have paid the mortgage or if you have paid for large improvements to the house. This is a complex area – discuss your situation with National Debtline if you think it might apply to you.
The Insolvency Service page Bankrupt’s Home covers many of the questions you may have.
What about my car?
If you have a car, you should expect to lose it unless it is essential. The simple case is where you have to have a car to get to work, for example there is no public transport or you have to travel for your job. You may also be able to have a car if it is essential for other reasons – health problems, school runs, caring responsibilities – here you will need to explain why this is the cheapest or only alternative you have.
If you need a car, you will be allowed to keep yours if it is cheap; otherwise it will probably be sold and you will be given about £1,000 to purchase a cheaper car.
NB if you drive a car that belongs to someone else, this car will be safe. This applies even if you are the registered keeper of the car. You may need to produce proof of who bought the car.
What about my possessions?
You will lose any financial assets (except your pension, see below) even if they are very small, such as a small life assurance policy or £25 in premium bonds.
You have to declare your assets on your bankruptcy application. Broadly the OR is not interested in the tools of your trade, your personal possessions and household goods unless they are of unusual value – you don’t even have to list them on your bankruptcy application unless they are worth more than £500 – that is their current second-hand value, what you could sell them for, not what they originally cost. Will I lose my lawnmower? looks in detail at this subject.
No-one will visit your house and make inventories of stuff to be sold. Your partner’s things and your children’s toys are not at risk.
Your partner or a friend can offer to buy any items which the OR does claim. As a general rule, you should not give away or sell assets for less than they are worth before you go bankrupt – this doesn’t apply to normal presents eg to children at Xmas. The OR can go back and overturn transactions up to 5 years in the past. You may already have done this without any intention to defraud the OR. If this is the case, you should list the sale/gift on your bankruptcy application.
Will my pension be affected?
If you are already drawing money from your pension, then the income from this forms part of the IPA calculations, see What happens after I go bankrupt?
If you are not yet drawing money from your pension then it is not at risk except under extremely unusual circumstances eg you have made extremely large contributions to it which seem to have been funded by debts; a normal company pension will not be touched.
This is a bit more complicated if you are over 55 and have a defined contribution pension. Basically your pension will not be touched but if your pension pot is large you may be considered not to be insolvent, so you cannot go bankrupt – see this article on Pensions and Bankruptcy if this might affect you.
Who will know that I have gone bankrupt?
The OR will inform your creditors and, sometimes, your landlord about your bankruptcy. Notices used to be printed in a local newspaper, but this is now very rare, usually only done if you are self employed and the Official Receiver thinks you may have some local creditors.
The Insolvency Service publishes a list of names on the internet of people who have gone bankrupt, had a DRO or an IVA. A small notice about your bankruptcy will be published in the London Gazette.
You may worry about your employer finding out you have gone bankrupt. Employers are not told by the OR. It may theoretically be possible for an employer to guess what is happening, because your tax code will be changed to a nil code. But this isn’t likely to be noticed: people’s tax codes change all the time and there are plenty of other reasons you may have a nil tax code apart from bankruptcy.
Help – a creditor is proposing to make me bankrupt
If one of your creditors is threatening to make you bankrupt, it may well be a bluff to get you to pay them more money. It is very unusual to be made bankrupt for a normal credit-card or loan type of debt. It happens more often for tax, including council tax, and commercial loans – did you guarantee a loan to your business? If you receive a Statutory Demand for any debt you should take this very seriously.
If your assets are worth more than your debts, you should do everything you can to avoid being made bankrupt by a creditor. Don’t think that this can just be reversed later – although this can be possible it is likely to cost you thousands or tens of thousands of pounds in extra fees. If you have a house with equity, then you could consider offering a charge over your house, but if you do this establish what (if any) interest will accrue and decide if you are happy with this.
Will I ever be able to get a mortgage afterwards?
It will be harder and you should assume that you will need a larger deposit than someone on the same income who has not been bankrupt. Read the page on Bankruptcy and your Credit Rating for a more detailed explanation.
But also step back and ask yourself whether you have any chance of getting a mortgage if you don’t go bankrupt. If you aren’t that young, or you don’t have a well paid job and you live in an expensive part of the country, then owning your own house may just be a dream with no real chance of ever happening. Don’t let this sort of wishful thinking stop you taking the necessary measures to deal with your debts.
OK, I want to know more about how I go bankrupt
The next bankruptcy information page The process of going bankrupt looks at timing, fees and completing the online bankruptcy application.
I don’t like the sound of this …
See if you have a better alternative! Work through all the options in Improve Your Finances. Then read through some of the Hard Choices pages which compare the pros and cons of different options: DMP vs insolvency, IVA vs bankruptcy and Selling the house. But if nothing else is looking better, sometimes you have to go for the least worst option, even if it’s not what you would have liked.