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Tackling your debts

How and when to declare yourself bankrupt

Posted 09 March 2016 by Christine Walsh

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Did you know that it’s possible to declare yourself bankrupt if you have unmanageable levels of debt? We’ll tell you how and when to do this.

Bankruptcy is a formal way to deal with insolvency and will have a significant effect on your life. As such, it should be considered carefully and only entered into when none of the other debt solutions are available to you. Having said that, declaring yourself bankrupt is sometimes the best thing you can do if you have debts that you know you won’t be able to pay back. In this blog we’re going to look at the situation you’d have to be in for this to be the case, and how you would go about declaring yourself bankrupt.

Before we go any further, bankruptcy is a way to deal with insolvency if you live in England, Wales or Northern Ireland. If you live in Scotland, then the equivalent of bankruptcy is Sequestration. For more information on all the debt solutions available in Scotland, click here.

When is bankruptcy the right solution?

The very first thing you need to do to find out whether or not bankruptcy is right for you is seek professional advice. If you want to do this now, our advisors are available, just use the options to the left of the page. They will take you through your income and expenditure, look at the types of debts you have, how much you owe and tell you whether or not bankruptcy is necessary for you.

You would only be able to apply for bankruptcy if your debts amounted to £750 or over and you couldn’t realistically pay them back within a reasonable amount of time.

If, after you’ve sought professional advice, you find out that bankruptcy is the right option, you are able to declare bankruptcy yourself – you don’t have to wait for one of your creditors to do so.

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What does bankruptcy involve?

Bankruptcy lasts for a year and during that time a Trustee would handle your affairs and make sure that any assets of value are used to give as much money back to your creditors as possible. If there is any equity in your home, you may have to sell it and put the money towards your debts. There are some special cases where this doesn’t apply, say for instance, if you needed to live in a certain house because it was modified to accommodate for a disability.

The Trustee would also look carefully at your budget and decide whether or not you needed to pay anything towards the bankruptcy every month, known as an Income Payment Agreement (IPA). If you didn’t pay the agreed amount, the Trustee can apply to the court for an income payment order which could take the money straight from your wages if necessary. If your income is made up solely of state benefits you won’t be expected to pay anything towards the bankruptcy. If you are told to pay something towards the bankruptcy, this may last for three years – so a couple of years after you’ve been officially discharged.

The bankruptcy forms

The first stage in declaring yourself bankrupt is to apply to the court to issue a bankruptcy order for you. There are two forms that you’ll need to fill out: Debtor’s Bankruptcy Petition and Statement of Affairs, both of which can be found on the Insolvency Service’s website.

The bankruptcy fees

There are costs involved in going bankrupt which, altogether, total £705. This is made up of £525 which goes to the official receiver, and a £180 court fee. If you’re on a low income or you receive a means tested benefit, you may be able to apply for the court fee to be waived, but you would still have to pay the official receiver’s fee. For information on how to do this, have a look at the Government’s page. If you’re also unsure about how you’re going to afford the OR fee, it might be possible for you to get help from a charity. Our blog What should I do if I can’t afford the bankruptcy fee? should help.

Once you have filled out the relevant forms, and you’ve got your fees together (or fee exemption form), you need to take them to your local court and make your bankruptcy application. There are four different things the court could do at this point:

·         accept your application and make you bankrupt

·         ask for more information

·         reject your application

·         reject the application and order an alternative 

You should hear back from the official receiver (the OR is the court official managing your bankruptcy) within two weeks. They will ask you to provide information about your debts at this stage, such as how much you owe and who you owe money to, as well as information about your income and any assets you may have. They may ask you to fill in a questionnaire with this information and also to attend an interview.

The bankruptcy interview

If your bankruptcy is accepted the official receiver will want to conduct an interview with you so that they can gather all the information about your case. It can take place in person or over the telephone, although when you are petitioning for your own bankruptcy, interviews are normally conducted over the phone.

The interview will usually take place within two weeks of the order being made, although it can, in some cases, take place straight after the order has been made. This is why it’s important to take your paperwork with you and get as organised as possible before you go to court. It can last around three to four hours and, occasionally, a follow up interview will be requested.

During the interview you may be asked questions about your statement of affairs form and what you spent money on, particularly within the last five years. Don’t worry if you don’t have complete records going back for the last five years, just try to gather as much information as possible and make sure you’re upfront and honest about what led to your current situation. You will be asked about any assets you have and whether you have a pension or any savings.

The Perjury Act will be explained to you during the interview and you will have to sign to say that you’ve heard and understood it. (The Perjury Act is concerned with making sure that people understand they must tell the truth when under oath and when what they say could influence the outcome of court proceedings.)

This interview may seem like a daunting prospect, but the official receiver isn’t trying to catch you out or look for reasons to stop your bankruptcy. They just need to follow procedure and to be sure they have an accurate and complete picture of the events that led to this point. The interview is also a chance for you to ask any questions you have about the bankruptcy process, so you may want to make a list beforehand.

Stop making any payments to your creditors

If your bankruptcy is approved you can stop making any payments to your unsecured creditors immediately. The only payment you should be making towards your unsecured debts are your IPA payments, if you need to make any at all.

Your creditors will hear from your OR about your bankruptcy, but there can sometimes be an over-lap in time. So, if you hear from your creditors asking you for money, just inform them about the bankruptcy and they should stop pursuing you. You will have to continue as normal with any mortgage and other secured payments.

Bankruptcy restrictions

If your bankruptcy is approved then you will have to observe the bankruptcy restrictions while it’s ongoing. You won’t be able to:

·         take out more than £500 in credit without telling the lender that you’re bankrupt and getting permission from your Trustee

·         be a company director without the permission of the court

·         start or manage a business without making it clear to your associated that you’re bankrupt

·         work as an insolvency practitioner, or provide debt advice

It’s possible that if you don’t comply with the restrictions that the terms of your bankruptcy could be extended for between 2-15 years.

Bankruptcy will have negative effect on your credit file and will stay there for six years from the date that you went bankrupt. This may mean that you find it hard to be approved for credit in the future after your bankruptcy has finished, or that you have to borrow at a more expensive rate because you don’t qualify for the lowest rates of interest. 

 

Some employers outline in their contracts that they don’t want any of their employees to become insolvent. In general, you don’t have to tell your employer that you’re going bankrupt, but it’s really important that you check your contract and know your employer’s stance on this before you try and make yourself bankrupt. If you were to go bankrupt then it would be recorded on the Insolvency Register which is publically accessible. A debt expert will be able to tell you if there could be a potential problem with going bankrupt because of your job, and may be able to recommend a more suitable debt solution for you if this was the case.

So that’s the long and short of how it works if you need to go bankrupt. It bears repeating that bankruptcy should only be considered if none of the other debt solutions are available to you, so you should always seek professional advice before you declare yourself bankrupt.

 

 

 

 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.