If you can’t pay your debts, there are various solutions that can help. It is important to seek free debt advice from a money adviser before making any decision on problem debt solutions. Free advice can be sought from: Debt Advice Locator | Syndication | MoneyHelper.
One way of dealing with debt is bankruptcy. However, there are lots of beliefs about bankruptcy – some of which can be unhelpful and misleading.
Here we look at, and address, the beliefs and misbeliefs about bankruptcy.
True or false: top ten beliefs about bankruptcy
We’ve asked our experts from the Official Receivers’ offices – the people who work directly with those who are going through bankruptcy – to reveal the top ten beliefs they encounter about bankruptcy, and to make clear the facts associated with them. Official Receivers act as trustees and manage your bankruptcy.
True and false
Many people think that being bankrupt means that you will lose your home – either by selling it if you are a homeowner or being asked to leave if you rent.
The truth is that you might lose your home, depending on the circumstances.
When your home might be sold:
- If the equity in the property (the difference between how much your house is worth and the amount you owe on your mortgage) is £1,000 or more.
- If you are the sole owner of your home, the trustee can sell your home and use the funds to pay towards your debts.
- If you own your home jointly, your share of the equity is transferred to your trustee. If the trustee has a court order, they can sell your jointly owned home to pay towards your bankruptcy, but the joint owner will get to keep their share of the equity in the house.
- If you have a mortgage, it is important that you keep making your mortgage payments. If you don’t, the lender may be able to apply for a court order to sell your home.
- If you have your family living in your home with you, the sale can be delayed for up to a year, to give you time to find somewhere else to live.
- If you have children or a disability and your home is sold, you should contact your local council if you’ll have nowhere to live.
When you might be able to keep your home:
- If the value of your home’s equity is less than £1,000.
- If the equity can be sold to someone else, such as a partner, family member or friend.
- The Official Receiver could let your landlord know that you are bankrupt.
- The bankruptcy does not affect your tenancy and your landlord won’t necessarily ask you to leave, especially if you have continued to pay rent and any other bills.
- If you live in a council or housing association home, you are unlikely to have to leave.
However, your landlord could ask you to leave:
- If your tenancy agreement has a clause to allow the tenancy to end if you are made bankrupt.
- If you break the terms of your tenancy agreement – for example by not paying your rent.
- By giving you notice that tenancy will end. The usual notice period is two months.
True and false
Your bank account may initially be frozen by your bank when they receive notice of the bankruptcy ultimately your bank or building society will decide whether to allow you to continue using your existing account or open a new account
- The Official Receiver will check what money you need for essentials, such as food, and not claim that money. If it’s a joint account, for example with a partner, they’ll also release the joint account holder’s share of the money.
- If you have other debts or an overdraft with your bank, the bank can keep the money in your account to set off against the amount they are owed.
- Joint accounts can still be frozen. Your bank could either close it and may refund the other account holder’s share of the money in the account or remove your name to turn it into a sole account in the other person’s name. The bank would then pay your share of the money in the account to the Official Receiver.
- Some banks may let you keep your bank account with them, after it has been initially frozen when you first become bankrupt. This will be a decision for the bank not the Official Receiver
- Your bank may let you keep a basic account (no overdraft or cheque book), rather than a current account. Again, this will be the bank’s decision.
- You can apply to open an account at a different bank after you are declared bankrupt, but it will be the bank’s decision whether to accept you for a new account.
Accessing money to pay bills:
Some people who can’t access a bank account pay bills and essentials by:
- Using a pre-paid debit card
- Joining a credit union
Although it will probably be more difficult to get a mortgage after bankruptcy, it can still be possible, with these considerations:
- If you have not been discharged from your bankruptcy you must tell the lender that you are bankrupt. Your bankruptcy restrictions generally end when you are ‘discharged’, which is usually automatic after 12 months.
- Mortgage lenders are likely to see you as a high-risk borrower
- It’s likely that you’ll need a bigger deposit than others with the same income and could be charged higher mortgage rates and fees.
- You might need to spend some time rebuilding your credit rating after bankruptcy before applying for a mortgage
True and False
Although being bankrupt is a matter of public record, it is not usually reported in the press in England and Wales. There are some rules including:
- All bankruptcies are published in an official public record called The Gazette, and also in The Individual Insolvency Register. Your details will be removed from the register after 15 months but remain in The Gazette.
- If you borrow £500 or more you must tell the lender you are bankrupt, until you are discharged from the bankruptcy (usually after 12 months).
- If you are self-employed or are going to start your own business (sole trader), you must use the same name(s) that the bankruptcy order was made in. Or you must clearly show that name in all correspondence, invoices or advertising.
- The Official Receiver will let your creditors (the people to whom you owe money) know.
- Your employer (unless they are one of your creditors) will not be officially informed unless you fail to make agreed payments to your trustee.
- There are some jobs in which you can’t work if you are bankrupt. And if you work for an organisation where you are likely to need a security check, you might need to let your HR department know that you are bankrupt.
- If you run a business, it will be closed down and any employees dismissed.
- If you are at risk of violence you will be able to apply for a court order, known as a Person At Risk of Violence Order, to stop your address being published. You can make this application before you apply for bankruptcy or once you know a creditor has applied for your bankruptcy.
You might be able to get credit in the future, although it’s likely to be harder to secure. Consider:
- As with getting a mortgage, lenders will check your credit rating and could see you as a high-risk borrower. If offered credit, it might be at a higher interest rate.
- Your bankruptcy will remain on your credit file for 6 years from the date of your bankruptcy.
- You won’t be able to borrow more than £500 without declaring that you are bankrupt, until you are discharged from the bankruptcy (usually after 12 months).
True and false
Your car may be an asset and could therefore be sold by the Official Receiver to pay your creditors, depending on circumstances.
If you own your car outright:
You could be allowed to keep your car if the Official Receiver decides that is essential It could be classed as essential if:
- you need it to do your job
- you need it due to a disability – yours or a family member’s
- there is no other way for you to get to work or school.
If your car is classed as essential but worth more than £2,000:
- the Official Receiver may sell it to pay creditors
- the Official Receiver would normally allow you £2,000 (England and Wales) to buy a replacement.
If you use a Motability scheme car:
Motability scheme cars are leased, rather than owned by you, and therefore cannot be sold by the Official Receiver. The Motability agreement might continue through your bankruptcy via payments including:
- Disability Living Allowance (DLA)
- Personal Independence Payment (PIP)
- Attendance Allowance.
True and False
Most, but not all debts will not have to be paid by you after bankruptcy. Debts that you will still have to pay include:
- student loans
- child maintenance arrears
- court orders (e.g., compensation payments, divorce payments)
- criminal fines
- debts due to fraud
- any debts taken out after the bankruptcy order is made
If you continue to live in a home with a mortgage, you are likely to need to keep up the mortgage repayments otherwise the lender may sell the property.
If you earn enough to have money left over after paying your reasonable regular living costs, it is likely that you will be asked to pay money towards your debts, during and after bankruptcy. This payment – usually made monthly – is called an income payments agreement (IPA) and can last for 3 years.
Bankruptcy can have serious repercussions in your current and future life; it is not something to enter into lightly, or without exploring alternative ways out of debt:
- it can affect your home, bank accounts, car, valuables, credit rating and, sometimes, your job.
- It is not a responsibility-free way out of debt, you will have duties to the official receiver and your trustee (if different) and you may have to pay towards debts through an Income Payment Agreement for up to three years.
However, bankruptcy can also provide a clean slate for your finances, and allow you to rebuild a life free of what might have seemed like unresolvable debts:
- If you cooperate with your trustee, going through the bankruptcy process can reset your financial future.
- The bankruptcy process has been made more accessible over the past few years, and you can now apply online to be made bankrupt, rather than through a court hearing.
You will be able to keep the things you need for daily living, including:
- Essential household equipment (e.g., cooker)
- Tools and equipment needed for work
- Your vehicle (but only if the Official Receiver agrees that it is essential for work, or there is no suitable alternative transport available to you). If your vehicle has a high value, the Official Receiver might sell it and provide you with money for a replacement
Other possessions vest in (transfer to) your trustee and could be sold to pay creditors.
- These days you apply to be made bankrupt by filling in an online form.
- If you don’t have computer access or don’t feel comfortable using one, friends or family can help. You can also get free help and advice from a debt adviser or from the Insolvency Service Enquiry Line.
- The Adjudicator will assess your application and decide whether you can be made bankrupt. If your bankruptcy is approved, you’ll usually be made bankrupt the same day.