Bankruptcy: How it Works and How it Will Affect You
Although bankruptcy is generally considered by many as a last resort, due in no small part to the stigma attached to having ones financial affairs made public, it does in fact allow those with financial difficulties to make a fresh start. It is simply no longer true that bankruptcy is reserved only for irresponsible or bad people, or those who cannot control spendthrift tendencies.
There are three ways in which you can be made bankrupt: you can petition for your own bankruptcy, you can be made bankrupt by a creditor, or if you are subject to an IVA, your supervisor or any of your creditors involved in your IVA can make you bankrupt.
What Will Bankruptcy Mean For You?Creditors are not allowed to contact you in relation to any of your debts to them, nor can they add interest to any of the money you owe them, nor can they take any court action against you. Most first-time bankrupts are made bankrupt for a period of twelve months, although this is shortened in some situations. This period of time may be extended for people who have been made bankrupt before. You can still have a bank account if you are bankrupt, but are unlikely to have a cheque book, debit card, or overdraft facility. As you cannot use a debit card, you should consider getting a pre-paid debit card.
AssetsIf you become bankrupt, the court will expect you to sell your assets so that your creditors can be paid. This includes your home, but does not mean that you will be left without any possessions at all. The court will allow you to keep normal household items, including your furniture, TV, DVD player, washing machine and fridge freezer. However, if the court considers that you own luxury items – even if you own them jointly with your partner – you may in some circumstances need to sell these.
The general rule is that if you have a luxury item that could be substituted for a cheaper one, you would be expected to sell it. One such example might be that you would have to sell a Porsche and replace it with a cheaper car.
Credit RatingBankruptcy damages your credit rating and the fact that you have been made bankrupt remains on your credit file for six years. Although there are lenders who are able to assist people with adverse credit to get a mortgage or other secured credit, the interest rates are likely to be considerably higher than for those with good or excellent credit ratings.
LimitationsDuring the period that you are an undischarged bankrupt you no longer have control over your own assets. You are prohibited from acting as a company director, and are not allowed to apply for credit of over £250 without seeking permission. You cannot apply for a mortgage, apply for certain jobs, or practice in certain professions (such as accountancy or law.)
Once You Become DischargedAt the end of the period of bankruptcy, you will become a ‘discharged’ bankrupt. Once this occurs, any debts included in the bankruptcy petition are written off by the court. This means that you are effectively free from these debts. However, not all debts are eligible for inclusion in your bankruptcy: student loans, court fines, and debts arising from fraud or other crimes. However, if the court has asked you to continue to make payments towards your debts (called an Income Payment Order) this will continue even after you are discharged from your bankruptcy for up to a period of three years.)
There are many alternatives to bankruptcy, such as an Individual Voluntary Arrangement or IVA, but it is worth considering all the options and your eligibility for them before deciding what to do about your debt problems.