People sometimes ask if they can go bankrupt after borrowing money recently. Yes you can: you are entitled to go bankrupt if you cannot repay your debts – bankruptcy won’t be refused because it seems you have “behaved badly”. However, if you have recently borrowed money, there may be consequences depending on your situation, so you need to know about these as they could mean you decide either not to go bankrupt or to postpone it.
There are three sorts of possible consequences if you go bankrupt soon after borrowing money:
- a prosecution for fraud. This would leave you with a criminal record and the fraudulent loan would not be wiped out by your bankruptcy. It is only likely to be considered if the evidence shows significant and deliberate deception.
- a Bankruptcy Restriction Order (BRO). If the Official Receiver (OR) decides your borrowing was reckless, for example you knew you were going to have to go bankrupt or used the money for gambling, then you may get a BRO. A BRO imposes various restriction on you,for example you can’t become a company director, these are detailed here.
- the Official Receiver may insist this money is returned if you gave away some of the money, or used it to repay relatives or friends you owed money to in preference to your other unsecured creditors,.
They sound pretty scary… it’s definitely not a good idea to deliberately borrow money just before going bankrupt. But if you have already, how likely are any of these three problems to happen?
What will the OR be interested in?
There are no absolute rules here. I can’t point to the Guidance Notes for Official Receivers and say you will have problems if you go bankrupt after borrowing more than £x,000 less than y months before. But the following factors are likely to be relevant to the OR’s decision:
- how much money is involved? All recent borrowing will be looked at but the OR is going to spend more time investigating a large bank loan than £100 from a payday lender.
- how long ago was it? Did you borrow the money only few days or weeks before going bankrupt or when you already had a Statutory Demand from a creditor so you knew you were likely to be made bankrupt? The larger the loan, the longer the period that will be relevant – a few months before bankruptcy you may have used a few hundred pounds of remaining credit on a credit card without thinking much about it, but if you applied for a £10,000 loan you should have considered whether you could afford it.
- did you lie on the credit application? The OR will be interested in how honest you were about the borrowing. If you said the loan was to consolidate debt or put a new kitchen in, was that what you used the money for? Did you exaggerate your income a lot or say you had a job when you were unemployed?
- what did you use the money for? If you used it to repay other debts, then your overall debt level didn’t increase, so the OR is unlikely to consider that the borrowing was reckless (but you still shouldn’t have used it to repay a friend or relative.) Replacing an unrepairable washing machine at a point where you hadn’t decided to go bankrupt was probably a sensible decision, taking the family to Disneyland when you had been given notice of redundancy wouldn’t have been sensible.
- did something unexpected happen after borrowing the money? Perhaps you or your partner lost your job, had your hours cut a lot, became seriously ill? Anything unexpected such as this means that you couldn’t have been planning on borrowing as much as possible then going bankrupt.
“I know I was stupid”
Most people who go bankrupt have done things in the last few months or a year that they now realise were stupid. That doesn’t mean the OR will decide to take any action.
Prosecutions for fraud are extremely rare. Bankruptcy Restriction Orders are more common, but if you look at this list of recent BROs you will see that most involve large amounts of money and/or what appears to be a deliberate attempt to evade paying taxes. The most important things are your intent when you borrowed the money – the longer ago it was, the less likely it is that you knew would be going bankrupt – whether there was deliberate deception and whether you gave preference to any creditors.
If you are still worried about going bankrupt soon after borrowing money, I suggest you call National Debtline on 0808 808 4000 or go to your local Citizen’s Advice Bureau. There you will be able to discuss your specific concerns in confidence.