If you’re considering applying for bankruptcy, it’s well worth familiarising yourself with how the process works and what the implications could be. And before you decide anything, it’s a good idea to seek debt advice from a free charity such as StepChange or Citizens Advice.
In this article, we run through what you need to know so that you can understand exactly how it will affect you and whether it’s the right choice for you.
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 £5,000 or more can apply for you to be declared bankrupt, but bankruptcy is usually only advised to those with unsecured debts of £20,000 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).
What is the process?
If you wish to be declared bankrupt, you will need to fill in an application form online. You will need to have to hand payslips, benefits statements, pension statements, bills, council tax rates, rent/mortgage details, and details of all your debts. You can find the full list of required documents on the government website.
You will need to pay £680 in England and Wales, or £669 if you live in Northern Ireland. If you pay online you can pay in instalments.
Note that in Scotland the process differs – you can only apply to be made bankrupt if you have received money advice and you must pay either £200 to apply for bankruptcy through the Full Administration Route or £90 if you apply through the Minimal Asset Route. Find out more on the AiB website.
Once you have submitted your application, the adjudicator will decide whether to make a bankruptcy order or reject your application within 28 days.
If you are officially declared bankrupt, your bank accounts will be frozen and any non-essential assets, such as property and possessions that you do not need for your everyday life may 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.
Anyone made bankrupt will need 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?
If you file for bankruptcy, you won't be able to take out a personal loan or credit card during that time.
But you should also be aware that during the 12 months after bankruptcy, you are likely to find it hard to get a standard current account offering an overdraft facility or chequebook.
This can prove challenging, especially if your salary is paid electronically, or you want to pay household bills by direct debit.
Instead, you could look to take out a basic bank account.
Two major banks that accept undischarged bankrupts as a matter of course are Barclays and Virgin Money, 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.
There's no overdraft with these accounts, but you can pay direct debits and standing orders.
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.
This may not initially appeal as it has £10 monthly fee (£15 for joint accounts) 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 onto a 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…
Some insurers, such as the AA, 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.
As a result, it’s likely to be difficult to renew your existing insurance policies and you may find the only option is to pay a higher price.
You’re also unlikely to be able to spread the cost by paying for your insurance monthly as insurers will conduct a credit search that will reveal your bankruptcy.
If you’re a homeowner, you may also have to give up your home and find rental accommodation. This can prove challenging, unless you’re able to find a financially stable friend or family member to act as a guarantor.
What happens once the bankruptcy is discharged?
Once your bankruptcy is discharged, it will remain on your credit file for a further five years.
During this time it will be harder to get credit, and if you do, interest rates will be higher.
You may also struggle to open a standard current account – especially one with an overdraft. It’s worth shopping around and finding out, but if you do find it difficult, a basic bank account could help you until you rebuild your credit rating.
If you want to apply for a credit card or personal loan, it’s a good idea to use our Eligibility Checker tool which will show you how likely you are to be accepted for a deal before you apply.
Simply click on the ‘Find a loan’ or ‘Find a credit card’ button on our comparison tables, enter details such as your name and how much you need to borrow, and you will then see a list of loans and credit cards along with how likely you are to be accepted for each.
For tips on helping to rebuild your credit file, read our article.
And remember, it can be a good idea to seek free advice from debt charities such as StepChange and Citizens Advice before you make a decision about bankruptcy.
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