There's long been a stigma associated with bankruptcy as an individual, but there are a lot of misconceptions about the law involved – and in some cases it could be the most sensible option for those overloaded with debt. Here's a brief overview of the rules in England and Wales, which were updated in 2015...
How does it happen?
Bankruptcy is basically a legal declaration – imposed by a court – that you are unable to repay your debts. It can be initiated in three ways: by an individual wishing to declare his or herself bankrupt, by a creditor owed more than £750 or by an insolvency practitioner if an individual has breached the terms of an Individual Voluntary Arrangement (IVA). An IVA is an agreement to pay back money owed at a set amount per week or month.
Then what happens?
Once you have been declared bankrupt you will be given a copy of the order in the form of a letter from the official receiver – who may also wish to interview you about your situation. This could be in person or by telephone. If you were forced into bankruptcy then you'll probably have a questionnaire to fill in regarding your assets, debts and creditors.
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If made bankrupt you will be compelled to inform any potential lenders of your status if trying to borrow more than £500. You will be barred from acting as director of a company and you will not be allowed to create, manage or promote a company without the permission of the court. If managing a business with a different name you must tell people you do business with that you are bankrupt – and you will also be barred from working as an insolvency practitioner. Breaking these conditions is a criminal offence and can lead to prosecution.
How long does this last for?
The restrictions will stay in place until you are discharged from bankruptcy, which is usually a year. However this can be longer if you fail to co-operate with the terms of your order, if you are dishonest or if you found to have acted carelessly.
So what about my assets then?
You must hand over your assets to the official receiver or insolvency practitioner dealing with your case (your trustee). You will be allowed to keep the tools of your trade and household items such as clothing, bedding and furniture, although if these a worth a large amount of money they may be taken. Bank cards, cheques and credit cards for any accounts which were in debt must be handed over, but your trustee may allow you money for food and may release your partner's share of funds.
Will I lose my home?
You might, yes. If the equity in your home is the only way to pay your creditors then your trustee may sell your property – using any money left after secure debts (such as your mortgage) have been settled to pay creditors. The sale of your home can be prevented if you are able to sell your "beneficial interest" (your share of the equity) to another person such as a partner or relative. It may also be delayed by up to a year if you need to find somewhere for children or a partner to live. It won't be sold if you have less than £1,000 interest in the property either.
Will I have to make payments from future earnings?
Possibly, yes. Your trustee may arrange for monthly payments to be made from your spare income, after your essential living costs are covered. This is called an Income Payments Agreement (IPA), unless you don't agree to it and it is mandated upon you – in which case it becomes an Income Payments Order (IPO).
Will all my debts be written off?
Debts arising from fraud or owed to another person who you have injured will not be wiped – unless a court orders so. Money owed in family proceedings will remain payable, as will debts unrelated to the bankruptcy – such as student loans.
How long will it stay on record?
The bankruptcy will show up on your credit record for six years after you were registered bankrupt. If credit agencies continue to show it after that time, you can send them a copy of your discharge notice and ask for it to be removed.
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