Research suggests that 3.4 million UK adults have severe debt problems, while the latest official figures show that the number of bankruptcies declared in the UK hit almost 19,000 in the second quarter of 2009, up more than 15% on the same period last year.
Here, we investigate what happens when you go bankrupt and what implications it has on your ability to qualify for financial products.
Why do people go bankrupt?
You can apply for bankruptcy yourself, or be forced into it by your creditors. Any company to which you owe £750 or more can apply for you to be declared bankrupt, but bankruptcy is usually only advised to those with unsecured debts of £50,000 or more.
If your debts are less than that, there may be another option such as an Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO). We will look at these in detail over the next few weeks.
What is the process?
A court must declare bankruptcy and you may have to explain why you are in debt during the hearing. Costs of about £500 are usual, and any non-essential assets, such as property and possessions that you do not need for your everyday life will be sold to pay off your debts. The remainder will then be wiped, unless your income is deemed high enough for you to make ongoing monthly payments, which can last for three years.
All bankrupts must stop using their bank accounts and cards, and agree to tell any potential creditors that they are bankrupt if borrowing more than £500.
How long does bankruptcy last?
Bankruptcy generally lasts for one year, during which time the debtor is known as an undischarged bankrupt.
The bankruptcy will, however, be noted on your credit file for six years, meaning that banks and other financial organisations to which you apply for accounts and services will be able to see it and take it into account when deciding whether or not to accept you as a customer.
What impact does bankruptcy have on your ability to take out financial products and services?
Most people will be unsurprised to hear that bankrupts won't qualify for personal loans or credit cards.
Potentially more surprising is that, during the 12 months after bankruptcy, you will also be unable to get a standard current account offering an overdraft facility or chequebook.
Not having a bank account can make life difficult, especially if your salary is paid electronically, or you want to pay household bills by direct debit.
This is why the Government introduced basic bank accounts in 2003 to provide a way for bankrupts, and other people who would otherwise be excluded by the financial services industry, to gain access to simple banking services. However, you may well find that you have to shop around to find even a basic bank account.
The only two major banks that accept undischarged bankrupts as a matter of course are Barclays and The Cooperative Bank, both of which offer basic accounts that will enable you to make cash card withdrawals, as long as you have enough money in your account, and pay bills by direct debit.
Another lesser-known provider is Think Money. It is a specialist debt advisory service but it also offers banking products to those in financial difficulty including a basic bank account, the Think Banking Managed Bank Account. This may not initially appeal as it has £12.95 monthly fee which, if you're struggling financially anyway, could seem like another unnecessary expense.
However, where this account differs from other basic bank accounts is that you are allocated a money manager who helps you work out exactly how much money you need to each month to cover your outgoings. This is then set aside and any remaining funds are transferred into a Card Account, which you can access at any time with your debit card. If the reason why you got into debt in the first place was because you're not great at managing your finances, this type of account could be worth considering as it may help you get back on track.
Loans, credit cards and current accounts are not the only financial services affected by bankruptcy, though. You may also find that going bankrupt affects your insurance arrangements.
It's not just money products which may be difficult to get...
Insurers The AA and esure, for example, state in their terms and conditions that policyholders must inform the company if they, their spouse or anyone linked to the policy has been declared bankrupt.
And the chances of spreading the cost by paying for insurance monthly are slim, as insurers will conduct a credit search that will reveal your bankruptcy.
Renting a property may also prove difficult. Homeowners who go bankrupt have to give up their properties, meaning that they will have to find rental accommodation. But most estate agents will turn down undischarged bankrupts unless they can find a financially stable friend or family member to act as a guarantor.
What happens once the bankruptcy is discharged?
Even after your bankruptcy is discharged, it will remain on your credit file for a further five years. You may therefore continue to find it difficult to get credit during this time.
You will not, for example, qualify for market-leading deals such as Alliance & Leicester's personal loan offer at a typical rate of 7.9% on £7,500 to £15,000. Instead, you will probably have to look at loan deals through specialist lenders such as FLM Loans, which will lend between £500 and £3,000 to anyone with a friend or family homeowner guarantor at a typical rate of 42.6%.
Credit card companies are also likely to treat you with caution and you may struggle to open a standard current account. Some banks may accept you as a customer, but others won't, so you'll need to shop around and accept the fact that a basic bank account may be all you'll be able to get.
Please note: Any rates or deals mentioned in this article were available at the time of writing.
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