Bankruptcy – what happens after going bankrupt

After you go bankrupt, you will have an interview with the Official Receiver, an Income Payments Arrangement may be set, and most people will be discharged after 12 months. This page looks at these events and how much difference going bankrupt makes to your life.

It is the last of three pages about bankruptcy. The first page dealt with the main questions people want answered and the second page looked at  getting ready for bankruptcy and the bankruptcy application.

This page assumes you have already taken the decision to go bankrupt  – but it’s useful reading even if you are still thinking through your options.

The interview with Official Receiver

The interview with the OR’s office will occur after your bankruptcy application has been approved – often a week or two later. It is usually a telephone interview but it can be at the OR’s offices. If you don’t want a telephone interview you can ask to have one in person. It will normally last for 3-4 hours. Occasionally there will be a need for a further interview.

You may be asked to complete a questionnaire in advance or to provide certain documents – in practice bring all your financial documentation, not just the items specified. If your interview is by phone, clear a large table and spread the stuff you may need out.

You may be asked questions about your bankruptcy application by one of the OR’s examiners, who will be mainly interested in what has happened in the last five years. You are likely to be asked in more detail what you spent money on.

Don’t worry if you haven’t got written records going back five years (who has?) or if you can’t remember something, or if you borrowed money on one credit card to pay the monthly payments on other debts – you know now that is foolish, but it is very common and it will not result in a Bankruptcy Restriction Order unless you have done it on an enormous scale for years.

You must co-operate with the OR and don’t try to conceal anything. If you do not co-operate you may be arrested and questioned in court and ultimately you may not be discharged in 12 months. At the interview the Perjury Act will be explained to you and you will have to sign to say that you have understood this.

They are asking all these questions so that they can feel reasonably sure that you are telling the truth and aren’t hiding anything. They aren’t judgmental – no-one is going to suggest that you shouldn’t have bought a new car or gone on holiday, even if you now think that was a stupid thing to have done. They won’t get angry or criticise. If you have ended up going bankrupt because of a business failure or a messy divorce, you may feel that you don’t get much sympathy; if you cry you will be given tissues, not hugs. They are professionals doing a job, not counsellors.

At the end of the interview you may be asked to find certain written records – statements, receipts etc. Just do your best – you are not going to get a Bankruptcy Restriction Order (BRO – see below for more about these) because your paperwork is missing bits provided the OR doesn’t think you are concealing anything.

Life when bankrupt

You should immediately stop making any payments to your unsecured creditors. You should carry on paying the mortgage and any secured loans unless you have left the property or intend to shortly. You should also carry on making payments towards any debts which will not be extinguished by your bankruptcy – check with the OR if you are unsure if a debt is being wiped out by bankruptcy or not.

The OR will inform your creditors of your bankruptcy but this can take a few weeks. If you are contacted by any of your unsecured creditors during this period, just quote your bankruptcy reference number to them – that will be the last time you hear from them.

If you have sufficient disposable income, you will have to make monthly payments to the OR under an IPA, see below. You must inform the OR of any assets and increases in income that you get before you are discharged, including any lump sums which you may receive such as a bonus, a redundancy payment or an inheritance.

You must stop using your existing bank accounts, credit cards etc straight away, but you are allowed to open a new Basic Bank Account.

You must not obtain credit of more than £500 without informing the creditor that you are bankrupt.

The tax owing for all tax years up to and including the tax year in which you are made bankrupt will be paid to the OR. So if you pay tax under PAYE, your tax code will be changed to a nil rate code for the remainder of the tax year. If you are self-employed, your duty to pay tax directly to HM Revenue and Customs will no longer apply to the tax year of bankruptcy or any previous year, except for self-employed workers in the construction industry, who will continue to have tax taken off their earnings at a flat rate of 18% after bankruptcy. You won’t be better or worse off because of these tax changes – you may get more through your pay packet, but that will increase the amount you pay to the OR. If you are unsure of what to do, ask the OR to explain.

If you are self-employed, your existing business is normally closed down and any employees will be made redundant. They may be able to make a claim to the National Insurance Fund for outstanding wages, redundancy etc. Any business assets will become the property of the OR unless they are exempt (eg tools that you will need to continue in business). However you can start to trade again, subject to restrictions. You are not allowed to be a Company Director and as mentioned above you are not allowed to obtain credit of more than £500 without informing the creditor that you are bankrupt. You will need to register again for VAT. If you would like to discuss how bankruptcy will affect you business, call Business Debtline.

If you want someone to buy out your share of the equity in your house, or any of your other assets, they should contact the OR as soon as possible after your bankruptcy order to progress this. If house prices rise, the amount that has to be paid will also increase.

Will I have to pay an IPA?

Most people don’t have to pay an IPA. In the last three months of 2015, only 13.4% of bankruptcy orders made resulted in an IPA – that is about 1 in every 8 people going bankrupt.

If, after looking at your monthly income and expenditure, you have over £20 of disposable income, you will be have to make monthly payments under an Income Payment Agreement (IPA). This is an amount which you will have to pay each month for three years from the date the IPA is made i.e. you will carry on making these payments after you are discharged. If you refuse to agree to an IPA, the OR can go to court and get an Income Payment Order set.

This may all sound very scary, but the Guidance Notes for the OR state:

Whilst the assessment of income and expenditure with regard to obtaining an IPA/IPO is intended to provide a return to the creditors where possible, it must also be remembered that the bankruptcy legislation is intended to provide the individual with an opportunity to start afresh and remain solvent in the future, so his/her expenditure should not be cut to a level where he/she will have difficulty funding his/her reasonable domestic needs.

If your income or expenses change during the three years, the IPA can be reviewed. So if you lose your job or go on maternity leave, your rent goes up or you get extra expenses after having a baby, these will all be taken into account. Equally, if your income increases or you get a bonus, your IPA will go up. An IPA has to be started before you are discharged – if one isn’t, then you will not have to pay one even if your income increases significantly after your discharge.

Your partner (or spouse – being married is irrelevant) doesn’t have to contribute money to your IPA, but they do have to make reasonable contributions to household costs, which will reduce the expenses that you have to pay.

The OR can’t generally have any effect on what you earn – if you want to walk out of your well-paid job and be a student for three years that is your choice. (The only exception here is that if you are able to draw your pension, you can’t decide not to in order to reduce your IPA. This is a complicated area and if it affects your decision to go bankrupt, you should get advice on this.)

When will I be discharged?

You will receive an automatic discharge from bankruptcy after 12 months unless either you have a Bankruptcy Restriction Order (BRO) made against you or you have not co-operated with the OR.

The Insolvency Service says:

“If your conduct has been dishonest or you have been in some way to blame for your bankruptcy, a bankruptcy restrictions order may be made against you. This will mean you will continue to be subject to the restrictions of bankruptcy for a further 2-15 years.”

That may sound worrying – almost everyone feels that they have been in some way to blame for their bankruptcy, and many people may have exaggerated their income a bit when applying for credit cards. But if this is the first time that you have gone bankrupt, you are unlikely to get a BRO unless a lot of your debts come from gambling or you have ended up owing large tax debts from your business.

After you are discharged from bankruptcy, all the restrictions and obligations mentioned above will cease, except that any IPA will continue until three years have passed and if you have an IPA you still have to inform the OR of changes in your earnings.

For full details about discharge, read What happens when I am discharged from bankruptcy?

Your credit record

Bankruptcy stays on your credit record for six years. During this time you will find it hard to get credit, although you can start the process of repairing your credit record after you are discharged.

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 Bankruptcy – summary

Pros gets rid of your debts, you only have to make payments for 3 years and they can be decreased if your expenses go up or your income falls, certainty – this can’t ‘fail’ like other debt options can
Cons may affect your job, your house is at risk, will always have to be declared when you apply for a mortgage
Debt Camel says If you don’t own a house and your job will not be affected, this is a good option if you owe more debt than you can hope to repay in a reasonable timescale. Other people need to balance the pros and cons of this against the other possible debt options.

If you haven’t yet looked at them, this would be a good time to check out the Hard Choice pages: IVA vs bankruptcy, long DMP vs insolvency, and Selling the house.

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