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What Happens If You’re Made Bankrupt?

What happen's if you're made bankrupt

Bankruptcy is a legal status that usually lasts for a year and can be a useful way to clear debts that you can’t pay. When you’re made bankrupt your assets will be seized to cover the cost of your debts. You will also be bound by strict bankruptcy restrictions and your name will be published on the individual insolvency register for the period of your bankruptcy, usually 12 months. After your bankruptcy period, you will be free to get on with your life without the debts that you previously had.

How Does It Work?

If you are experiencing difficulties paying personal debts of over £5000, and don’t have enough cash in the bank to make repayment then you may either be declared bankrupt by your creditors or can voluntarily declare yourself bankrupt, in either case, what happens if you’re made bankrupt?

When you are made bankrupt any non-essential assets that you own including property, possessions, savings, cars and household items etc. are sold to pay off your creditors.  When you reach the end of your bankruptcy period, your debts will be cancelled.

Ending Bankruptcy

Being made bankrupt is a serious process that has a long term impact on your ability to borrow money and set up or manage a business. Bankruptcy usually lasts for 12 months but it may be longer if you break the terms. You can also choose to end it early by cancelling your bankruptcy which removes your details from the insolvency register.

Read on to find out more about how you can be made bankrupt, what it means to be bankrupt and the implications that being made bankrupt can have on your life.

Being Made Bankrupt

person holding an open, empty wallet

There are two ways that you can be made bankrupt; either by your creditors (the people that you owe money to) declaring you bankrupt or by voluntarily declaring yourself bankrupt.

Being declared bankrupt

  • You can be declared bankrupt by others if you owe more than £5,000 but your creditors must try other legal ways to get you to pay your debt before applying to make you bankrupt. Options include a statutory demand or a court order. 
  • You can be declared bankrupt by others if you break the terms of your individual voluntary arrangement
  • You can be declared bankrupt if you give false information to obtain your IVA.

 
Voluntarily declaring yourself bankrupt

  • If you are declaring yourself bankrupt, you must also have considered all other options of repayment before making an application for bankruptcy and agreeing with an individual voluntary arrangement or IVA. 
  • If applying for voluntary bankruptcy, your application will be reviewed by an ‘adjudicator’ who works for the Insolvency service. It is their job to decide if you should be made bankrupt or not. 
  • Declaring yourself bankrupt is not an easy way out so you should always talk through your decision with a debt adviser, solicitor, accountant, insolvency practitioner or financial adviser in the first instance. There is free support available from the Citizen’s advice bureau or the National Debtline too. 
  • Now that you know how you can end up bankrupt, let’s look into what happens next, and how your family, credit score and business will be affected.

 

What Happens After Being Made Bankrupt?

When you have been made bankrupt, you will receive a copy of the bankruptcy order, you are bound by a strict set of rules dictating how you must live your life for the period of bankruptcy, and will have your name and details published on the individual insolvency register.

The restrictions of your bankruptcy will cover your finances, business interests and things that you can own, and If you break these rules, the period of bankruptcy can be extended.

After you are made bankrupt;

  • An official receiver or trustee in bankruptcy will take charge of your assets. This essentially means that you have to ask somebody else if you want to spend any money. 
  • The receiver or trustee will share the value of your assets out with the people or businesses that you owe money. This might include your car, house, gym kit, jewellery, anything that isn’t essential to basic living such as your clothes and household items such as a bed or sofa. 
  • You have to tell the receiver or trustee about all money that you have in any bank accounts. You will then be given a basic living allowance during the period of your bankruptcy and any other cash that you have will be divided between the people or businesses that you owe money to. 
  • You cannot apply for credit of more than £500 – whether that is on your own or with someone else – without declaring your bankruptcy status.
  • You must disclose your bankrupt status if you want to apply for a new bank or building society account and will not be allowed an overdraft or chequebook
  • It is very unlikely that you will be accepted for any new credit applications, and if accepted the cost of repayment interest would be incredibly high. 
  • After 12 months you’re usually released from your bankruptcy restrictions and debts owed. Any assets that were part of your estate during the bankruptcy period can still be used to pay your debts.

 

 Can I Keep Anything That I Own?

personal belonging in boxes

After you have been declared bankrupt, the only assets that you will be allowed to keep are those that are essential to your work or basic living such as a car or tools, clothing and basic household furniture such as white goods and bedding.

If you possess very expensive or extravagant clothing or furniture, you may be told to replace this with a cheaper alternative and any profits from the sale of your original items would be given to your creditors.

If the terms of your bankruptcy mean that you have to sell your home, then you are usually given a grace period to find a new place to live or can ask friends or family to buy your share of the property at market value.

Can I Still Earn Money When Bankrupt?

You can keep your job during bankruptcy but any income that you bring home, including pension payments made when you’re bankrupt, may be reduced by monthly payments to your creditors.

Your trustee will tell you if you need to make any payments and how much this will be but is usually only required if you have spare income once living expenses such as rent, mortgage and food are taken care of. This arrangement is known as an income payment agreement (IPA), can last for up to three years and you must agree if your trustee specifies it as a requirement. If you don’t they can apply for a court order.

Will My Business Be Affected?

Whilst bankruptcy only applies to individuals, it can affect how you are allowed to trade if you already own a business or want to set up a new one during your bankruptcy.

If you are made bankrupt, you must tell your business customers what name you were using when you were made bankrupt and can’t carry on the business in a different name.

How Will Bankruptcy Affect My Family?

Whilst it will be your name shown on the insolvency register when made bankrupt, if you’re financially connected to somebody else such as a spouse, then your bankruptcy could negatively affect how lenders view them in the future. If no financial connection exists then your family’s credit information shouldn’t be affected.

You and your family will be living a very basic lifestyle for the period of your bankruptcy so they will need to be prepared for this and you should discuss the consequences of your bankruptcy openly so that everybody knows what to expect.

If your partner or spouse jointly owns the property that you live in or the possessions that you have, then they will be given the chance to buy your share when they are valued to repay your creditors. If the items end up being sold, the proceeds from the sale will be split between your partner and the creditors.

How Long Will Bankruptcy Affect My Credit File?

Your bankruptcy status will be shown on your credit report for six years or until you’re released from it if this is longer than six years. This can impact your credit score. As part of the restrictions placed upon you when bankrupt, you must tell lenders about your bankruptcy when applying to borrow over £500 and employers or landlords may ask for your credit information before progressing employment or rental agreements with you. You must be prepared for the negative effect that your bankruptcy may have on these areas of your life. 

Who Will See That I’m Bankrupt?

Petition for bankruptcy document

When you’re made bankrupt your details will be published on the individual insolvency register. This is a list of people who have gone bankrupt or signed an agreement to deal with their debts in England and Wales. Scotland and Ireland hold separate lists.

The insolvency register can be searched by anybody but is most likely to be used by creditors, utility suppliers, professional bodies, local authorities and landlords when deciding whether to enter financial agreements with you. Your details are usually removed within three months of your bankruptcy ending

Help And Advice About Bankruptcy

If you’re being made bankrupt, you can get free advice by calling National Debtline and can meet representatives from the Money Advice Service and Citizen’s Advice

Related Questions

Pros And Cons Of Bankruptcy

It may seem on the face of things that there are only negative outcomes of bankruptcy but depending on your situation, you may be able to find some positives too. Here is a summary of some of the pros and cons of bankruptcy.

  • When you are released from bankruptcy, usually after one year, you will be free of the debt that caused you to become bankrupt in the first place. 
  • Although going through bankruptcy is a stressful experience, it may feel like a weight has been lifted off your shoulders and provides a chance to start again. 
  • The Courts may take your passport away if they believe that you are a flight risk and might try to travel abroad to sell your assets.
  • Your bank accounts may be closed which can make managing your day to day expenses difficult. From paying your salary to paying for bills, if your account gets closed you will have limited options available to you for opening a new one due to your credit history. 
  • Whilst you may lose valuable possessions, you will be able to keep the items that you need to live and work. This process may be quite cleansing and allow you to see what is important to you when the assets you use to portray yourself are stripped back to a bare minimum. 

 

Is There An Alternative To Bankruptcy?

It may be possible to make informal agreements with your creditors that will allow you to repay what you owe over an agreed timeframe. Before bankruptcy, you should consider;

  • Negotiating repayment terms with creditors via insolvency practitioners 
  • Obtaining an Individual Voluntary Arrangement (IVA) is an agreement with your creditors to pay all or part of your debts that gives you more control over your assets than bankruptcy. 
  • Asking for an extended repayment timetable directly from your creditors 
  • Obtaining a debt relief order if you cannot pay and don’t owe more than £20,000

What Is The Insolvency Register?

The insolvency register is a public register in England and Wales that hold details of individuals who have:

  • Active bankruptcies or those that have ended in the last 3 months
  • Active debt relief orders or those that have ended in the last 3 months 
  • Current bankruptcy restrictions orders or undertakings and interim bankruptcy restrictions orders 
  • Current debt relief restrictions orders or undertakings and interim debt relief restrictions orders 

Personal information shared on the register includes your name, date of birth, gender, dates and details of the financial orders against you, occupation and last known address.  

The insolvency register is available to view by anyone wishing to search for people who have gone bankrupt or signed an agreement to manage their debts in England and Wales.

Summary

If you are experiencing difficulties paying personal debts of over £5000, then you may be declared bankrupt by your creditors In this situation, you can also voluntarily declare yourself bankrupt subject to the approval of an adjudicator working for the insolvency service.

To recap, if you’re wondering what happens if you’re made bankrupt; 

  • Your assets can be seized to cover the cost of your debts. 
  • You will also be bound by strict bankruptcy restrictions on what you can and can’t do financially 
  • Your name will be published on the individual insolvency register for the period of your bankruptcy
  • After your bankruptcy period, you will be free to get on with your life without the debts that you previously had.

 
If you are concerned about debt or bankruptcy matters, you can obtain free advice from the following services; The National Debtline, The Money Advice Service and Citizen’s Advice

 

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