The truth about bankruptcy
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Apart from the application fee, you'll only have to make payments towards your bankruptcy if you can afford to. If the amount you can afford to pay goes up or down, your payments can be changed accordingly.
If your debts have become too much for you to handle then it’s a good idea to look into the different debt solutions available and how they work. If you do this, as well as making sure that you take expert money advice, you will have made a good start on the journey to getting your debts under control and being able to look forward to a financially stress-free future.
Bankruptcy is one such way of dealing with your debts and can provide a fresh start financially. However, it might also mean changing some things about your lifestyle and living with restrictions, so should only really be considered when no other debts solutions are available to you.
You won’t ever know whether a particular debt solution is right for you unless you look into it in detail. With this in mind, we’re going to look at the payments you may be expected to make during bankruptcy and whether or not there’s any flexibility with them.
The information we’re going to give you applies to bankruptcy in England, Wales and Northern Ireland. If you live in Scotland, you should look into sequestration which is the equivalent of bankruptcy.
What is bankruptcy?
Just to be clear, bankruptcy is a formal, legally binding debt solution designed to help people who are insolvent deal with their unsecured debts. This means that you are no longer able to repay your unsecured debts at the rate that was originally agreed to when you signed your credit agreements. Bankruptcy normally lasts for one year and, if everything goes to plan, after this time whatever balance is left on the unsecured debts included on the plan would be written off.
The cost of going bankrupt is £705 which is made up of a court fee of £180 and the Official Receiver’s fee of £525. If you are on any means tested benefits you may be able to get help with the court fee. If you’re worried about affording the fees in general then our blog, What should I do if I can’t afford the bankruptcy fees should help.
Income Payment Agreements
You are sometimes expected to make payments towards your debts during bankruptcy. This is known as an Income Payment Agreement (IPA) and can last for up to three years – so a couple of years after you’re officially discharged from the bankruptcy. When you apply for bankruptcy the court will appoint a Trustee who will oversee the process to make sure that as much money is paid back to the lenders as possible and that it completes successfully. Your Trustee will look carefully at your finances and decide whether you can afford to have an IPA and, if so, how much you’ll be expected to pay into the bankruptcy.
An IPA is normally structured as a monthly payment, however, in some rarer cases, you may be asked to make one lump sum payment instead. In some cases it might be better to look into settling your debts or a full and final IVA if you have a lump sum. For more information on IVAs click here. You would normally only be expected to have an IPA if you had £20 or more in disposable income every month. It’s important to note that if your income is made up solely of state benefits you won’t be expected to make any contributions to the bankruptcy at all.
If the Trustee decided you had to pay an IPA and you didn’t, they would be able to go to court to obtain something called an Income Payment Order. This would give them the power to take the money directly from your wages if necessary.
What flexibility is there?
How much you pay depends on how much disposable income you have, this is the amount of income you have left once all your essential bills have been paid each month. There is some flexibility built into the bankruptcy payments, so that they are able to change if your circumstances do. There are any number of life events that might make it difficult for you to maintain payments, for instance, if you lose your job, go on maternity leave, or your rent goes up. It’s very important that you tell your Trustee as soon as you know they’ll be a change in what you can afford.
As we said, you may need to carry on making your IPA payments after you’ve been discharged from the bankruptcy. It is possible to vary your IPA payments after you’ve been discharged, if you can provide evidence of your change in circumstances and your Trustee agrees. You won’t however be asked to start an IPA from scratch after you’ve already been discharged from the bankruptcy even if your income increases significantly.
If you find that you won’t be able to afford your payments for a few months, but you think that the change will be temporary, the Trustee does have the power to suspend your payments or arrange for you to pay later. You would, of course, have to provide evidence to back up the change in your finances. If your income increased again and you had more disposable income, you would be expected to start paying towards your debts again.
Bankruptcy is one option to deal with your debts, but it may be that there’s another option that’s better for you. Whilst there are definite advantages associated with bankruptcy, there are also disadvantages that you need to be aware of. For example, your assets, including your home (if you own one), are likely to be sold and your credit score will be damaged for the medium to long term.
For more information on the pros and cons of this solution make sure you check our bankruptcy page. If you want to talk through your options for dealing with your unmanageable debts with an expert, don’t hesitate to use one of the options to the left, one of our advisors will be happy to help.
by Christine WalshBack to blog home