If you are thinking of going bankrupt, there will probably be a lot of things that you want to ask.
This page looks at the nine most common questions people have about how bankruptcy will affect your life.
A brief overview of bankruptcy
You apply to go bankrupt online. The old days of having to go to court, before a judge, with masses of paperwork have ended.
Bankruptcy writes off almost all of your debts. It can give you a new beginning, a clean start in life.
When you go bankrupt, the Official Receiver (OR) will decide:
- if any of your assets will be sold. But most people do not lose any assets!
- if you have to make monthly payments for three years, called an Income Payments Agreement. But five out of six people do not have to make any monthly payments!
You will be discharged from bankruptcy after a year. After you are discharged you will find it harder and more expensive to get credit for the six years that bankruptcy shows on your credit record.
Everyone should get advice from a good free sector debt adviser before deciding to go bankrupt. No matter how obvious you think bankruptcy is, it is always worth 30 minutes of your time to talk to an expert as you may have better alternatives. Read A guide to bankruptcy which looks at these.
1. Will I be allowed to go bankrupt?
Yes! People often worry that they will be told they can’t go bankrupt as they will be told they just have to pay off their debts. This doesn’t happen.
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”. The most common reason for an application to be rejected is that the person doesn’t normally live in this country.
If you have taken advice from a good free sector debt adviser and have been told that bankruptcy is a good option for you, then your bankruptcy is going to be approved.
2. What about my job?
There are some jobs which you cannot do as a bankrupt eg be an MP, be a company director. In some professions – solicitors, accountants, financial advisers – you may be prohibited by your professional body from practising until you are discahrged from bankruptcy after a year. 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. If you are a member of a Trade Union, they will have come across other people in this situation and know what happens in practice.
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.
Business Debtline can advise if bankruptcy is a good option for the self-employed and people with small limited companies.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.
3. 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. But if your credit rating is already very poor, going bankrupt 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 common sense 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.
4. I’m buying – what happens to my mortgage and my house?
The Insolvency Service page Bankrupt’s Home covers many of the questions you may have about this.
Your mortgage and any secured loans are included in your bankruptcy. If you have handed back the keys to the lender or you have been evicted by the lender any shortfall after the property is sold will be a debt that is wiped out by your bankruptcy. This applies even if you pay the mortgage for a while and then hand back the keys.
But if you carry on paying your mortgage and secured loans your lenders will not repossess the property, so it may feel as though bankruptcy hasn’t affected your secured debts.
How much equity do you own?
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.
When deciding how much equity you have, it can be reasonably argued to the OR that a lower value of the house should be agreed 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 – it needs a new roof, the boiler is 20 years old etc – as these can all reduce the amount of money needed to purchase your equity.
When you own the house jointly, the OR can still force a sale of the house, but your partner will be able to keep all their share of the equity. You can 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 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.
Ways to avoid losing your house
The OR has three years to decide what to do with your property. If there is no equity at the end of this time, the house will usually be returned to you.
You can avoid losing your home if a relative or friend can “buy” your equity from the Official Receiver:
- this could be your partner who owns the other half of the house if they are not 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 plus costs of a few hundred pounds.
If you cannot arrange for someone to buy your equity then you are going to lose your home:
- you should explore the alternatives of a DMP and an IVA in detail before deciding that bankruptcy is preferable.
- when your family are living with you, you are usually given 12 months before the sale to give time to make other living arrangements.
- if you have children or a disability, having your house sold by the OR will usually mean that your local council will be obliged to re-house you when you are made homeless.
- if you prefer to rent privately you will be allowed to save up a deposit for renting. Sometimes this could be done by stopping paying the mortgage.
There is no point in trying to transfer your half of the house to your partner (or anyone else) before you go bankrupt to avoid losing it. 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.
5. What about my car?
If you have a car, you may lose it unless it is essential. The simple case is where you have to have a car to get to work, perhaps there is no practical 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. You will need to explain why this is the cheapest or only practical alternative you have.
But if you drive a car that belongs to your partner or a relative, it is safe. This applies even if you are the registered keeper of the car. You may need to produce proof of who bought the car.
If a car is essential, you will be allowed to keep yours if it is worth less than £2,000. Otherwise, it will probably be sold and you will be given up to £2,000 to purchase a cheaper car.
Cars on finance
The exception here is a car on finance. Here you do not own the car but it is more complicated and you should talk to a debt adviser. Some finance agreements have a clause which allows the lender to end the agreement if you go bankrupt or enter an IVA.
If you have HP which is just about to end, you may soon own the car. But early in finance or with PCP, most cars on finance will have negative equity, so the OR will not want to sell them.
Whether you are allowed to make the finance payments will depend on how large they are and whether you need the car for work.
6. What about all my other possessions?
You will lose any savings and investments (except your pension, see below) even if they are very small, such as £25 in premium bonds.
For possessions, you have to list your “assets” on your bankruptcy application if they are worth more than £500.
This £500 is their second-hand value, what you could sell them for, not what they originally cost. Even a new laptop or large fridge freezer is unlikely to be worth £500 second-hand!
It’s important to emphasise what doesn’t happen and what is not at risk:
- no-one will visit your house to make a list of stuff to be sold.
- the OR is not interested in the tools of your trade, your personal possessions, clothes or household goods unless they are of unusual value. Will I lose my lawnmower? looks in detail at this subject.
- your partner’s things and your children’s toys don’t have to be listed and are not at risk.
Your partner or a friend can offer to buy any items which the OR does claim, such as your car.
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 five 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.
7. Will my pension be affected?
If you are already drawing money from your pension, then the income from this is included in the Income Payment Agreement calculations, see What happens after I go bankrupt?
If you are under 55 and 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.
8. Who will know that I have gone bankrupt?
The OR will inform your creditors and, sometimes, your landlord about your bankruptcy.
Your employer is not informed of your bankruptcy. In theory, an employer could guess what has happened because your tax code will be changed to a nil code. But this isn’t likely – 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.
The Insolvency Register has the official list of names of people who have gone bankrupt, had a DRO or an IVA.
If you are at risk of violence, it is possible for your address not to be published – talk to a debt adviser about how to do this.
Bankruptcy Notices used to be printed in a local newspaper, but this is now very rare. It is usually only done if you are self-employed and the Official Receiver thinks you may have some local creditors. A small notice about your bankruptcy is placed in the London Gazette.
9. Can I 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. ]
The other insolvency options (IVAs and DROs) all have the same effect on your chance of getting a mortgage in future.
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.
Help – a creditor is proposing to make me bankrupt
If one of your creditors is threatening to make you bankrupt, it may 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?
But if you receive a Statutory Demand for any debt, this is not a bluff and you should take this very seriously as you need to settle the debt or get debt advice very fast to prevent yourself being made bankrupt. Phone National Debtline on 0808 808 4000.
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 bankruptcy can just be reversed later – although this can be possible it is likely to cost you 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.
What to do next
The next bankruptcy information page The process of going bankrupt looks at the timing of going bankrupt, the fees and completing the online bankruptcy application.
If you don’t like the sound of bankruptcy, see if you have a better alternative!
If you owe less than £30,000, are renting and have little spare income, a Debt Relief Order could be better for you – it has almost all the advantages of bankruptcy but there is only a fee of £90 to pay!
Read about the Hard Choices – on those pages I 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 bad option, even if it’s not what you would have liked.
You should always take debt advice before going bankrupt – this is a big step and even if you think it is your only option, it is always worth half an hour of your time to talk to an expert about this.