The real impact of going bankrupt

Bankruptcy is generally viewed as a last resort for people with serious debt problems. Here's all you need to know.

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The good news is, research suggests that the number of bankruptcies is falling. 

In fact, there were 3,744 bankruptcies in the first quarter of this year, down 0.7% from the previous quarter and down 10.8% compared to the year earlier.

However, bankruptcy clearly still affects a lot of people. So 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 £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?

As of April 2016, bankruptcy applications are no longer dealt with in court in England and Wales. The same will apply for Northern Ireland from November 2016.

Instead, if 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 here.

You will need to pay £655 in England and Wales, or £647 if you live in Northern Ireland (as of November 2016). 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 here.

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.

All bankrupts must 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.

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 £17.50 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 onto a prepaid debit card, 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 - and you won't qualify for the best rates.

Credit card companies are 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.

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.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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