The truth about bankruptcy
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Arm yourself with everything you need to know about bankruptcy with our myth-busting guide.
There are lots of myths surrounding bankruptcy … myths that scare people and make them reluctant to find out more about this debt solution. It’s often associated with negativity, but it’s really important to remember that being made bankrupt isn’t the end of the world. In fact, it can often be the lifeline that you need.
We’ve put together this guide to help put the record straight. We asked our debt advisors to list the most common misconceptions they come across regarding bankruptcy. Then, we’ve done our very best to answer them for you.
Myth 1 … Only I can make myself bankrupt
This isn’t true. As well as being able to declare yourself as bankrupt, there are two further ways you can be forced in to bankruptcy by your creditors:
- If you owe a creditor more than £750, they can apply to have you made bankrupt
- If you already have an Individual Voluntary Agreement (IVA), but you’ve not kept to the terms agreed
However, although some creditors have the power to do this, the likelihood of them forcing your into bankruptcy is slim. It costs them money, about £1000, and they still may not get anything back from you.
Myth 2 … I’ll lose everything
One of the most worrying parts of becoming bankrupt is the thought of losing everything, so let’s clarify the situation. This is part myth, part reality, depending on your individual circumstances. You may have to give up your house (if you own one) and your car and any other assets the official receiver thinks can help pay off your debt. This is especially true if it’s the only way they see your debts getting paid. But it’s all done fairly, so if your house has to be sold, the official receiver will try to give you every opportunity to get yourself settled somewhere else first. You could be given up to a year to find suitable alternative accommodation.
They also don’t want to deprive you of your means to make money either. So, there are occasions when you may be allowed to keep certain things that you need to continue working, such as tools or a vehicle for your job. If you’re a plumber, for example, you’d be able to keep your van and your tools, so that you can continue to work.
And, you will, of course, be able to keep household items, such as bedding and furniture, as well as, your clothes and shoes … no one can be expected to live without these essentials and neither will you.
Myth 3 … I will have to leave my rented home
This depends on your landlord. Some have break clauses in the contract that allow them to ask you to leave if you are declared bankrupt. However, having somewhere to live is really important, so it will be classed as a priority bill. And, as a priority bill, your rent will be counted in the budget you’ll put together with the official receiver. So, the chances of your rent not being paid once you’ve been made bankrupt is very low, and if your rent is paid on time, your landlord should have no issue with you staying on.
Myth 4 … I’ll have to give up my bank account and I’ll never get another
Again, this is half true. Whilst it’s correct that once you’ve been made bankrupt you will lose access to your bank accounts, it does not mean that you’ll never be able to have a bank account again. The banks understand that you’ll need certain basic account functions to be able to live your life so there are accounts out there for people in this situation.
If you’re declared bankrupt, you will have to hand over all the cards and cheque books to the official receiver. Your accounts will be frozen, but don’t panic as the receiver will allow access to money for essential items, such as food. If you have a joint bank account, your partner will be able to access their share of the money.
Some banks will allow you to continue with the same account, others will make you change to a basic account, that only allows you to have a cash card to withdraw money, and some will ask you to close your account. If your bank doesn’t want you anymore, you can move to one that does.
Myth 5 … It’ll cost hundreds of pounds to make myself bankrupt
Well, it does cost quite a lot, £525 to be precise, which can seem like a fortune when you’re already struggling. There are some other fees you may need to pay too. These are court charges and are usually about £180, however, if you’re on income support, you might be excused from this payment. Some people have to borrow from friends and family to make this payment, but it is essential, as the court won’t even consider your application without it. Fortunately, once these two fees are paid, that’s it.
Myth 6 … I’ll be bankrupt forever
No you won’t, is the very simple answer to that. The courts don’t want to ruin your life forever, so bankruptcy orders usually last about 12 months from the date they are declared. However, this can depend on the circumstances of the bankruptcy and whether you were considered to be culpable in some way, in the run up to your bankruptcy; how co-operative you have been with the official receiver; and whether any of the restrictions of the order were broken. If any of these circumstances occur, you could be subject to a bankruptcy restriction order (BRO) or bankruptcy restriction undertaking (BRU), which will extend the time you are bankrupt. Being un-cooperative means withholding important information, or something equally serious like being dishonest or careless, so unless you’re trying to do this, it’s not likely that these extra restrictions will apply to you.
Under normal circumstances, the longest period of time that it’ll show on your credit history is 6 years, after that all trace of it disappears.
Myth 7 … No one wants to employ a bankrupt
That’s not true. Whilst there are some restrictions on what you can do once you’ve been declared bankrupt, it does not prevent you from working. If you already have a job, depending on what it is, you may be obliged to inform your employer, but it’s not likely that you’d be let go simply because you’ve fallen into debt. However, some roles do exclude bankrupts, including those who would be advising others on the same topic, for obvious reasons, as well as MPs and accountants.
Once you’ve been declared bankrupt there are a number of restrictions placed on what you are allowed to do in the future. You cannot:
- Act as a company director or set up, manage or promote a company, without the permission of the court.
- Manage other businesses, with different names, without telling the people you are dealing with about your bankruptcy.
- Gain work as an insolvency practitioner.
If you plan on borrowing more than £500 from a lender, you are obliged to inform them that you have been made bankrupt. If you break the restrictions, you are breaking the law and you may be criminally prosecuted as a result. So, if you want to do something, and you’re not sure if it breaks the rules or not, the best thing would be to check with your insolvency advisor.
Myth 8 … I’ll lose my pension
No you won’t. Pensions that are approved by HM Revenues and Customs are protected from being claimed as an asset by the Welfare Reform and Pensions Act of 1996. So, you can rest assured that it’s safe.
Myth 9 … I won’t need to pay anything once I’m made bankrupt
This is not true, as it depends on what you’re earning. If the receiver feels there’s enough left over each month for you to make payments towards the amount owed, usually more than £20, then you will be expected to pay this towards your debts. The arrangement is called an Income Payments Agreement and can last up to three years. So, even when you have been officially discharged as a bankrupt after a year, you will still have to continue making payments until the term of the IPA is finished.
Myth 10 … My credit rating will be affected forever
No, it won’t. Bankruptcy remains on your credit file for six years. And, when you arrive at the six year stage, you’ll need to contact the credit reference agency and ask that they remove the bankruptcy notice from your file. You may need a letter from the official receiver to do this. Plus, there are specific products you can use to help build up your credit score again once your bankruptcy has ended. However, in extremely rare cases, if you have a BRO or BRU in place, the bankruptcy can remain on your file for up to 12 years.
Myth 11 … My partner lives with me, so they’ll be affected too
This is another of those instances where it depends on your circumstances. If you have nothing in joint names, even if you’re married, it should not affect your partner. However, if you do have things in joint names, such as a bank account or a mortgage, it will. This is most likely to happen when you have a joint mortgage, bank account and so on.
Myth 12 … Everyone will know
This used to be the case, but not anymore. Bankruptcies are no longer declared in the local newspaper, unless there are some exceptional circumstances or you’re self-employed. They do appear in two trade publications for creditors though … the London Gazette and the Edinburgh Gazette … to allow any potential creditors the chance to come forward.
However, it’s important to understand that bankruptcy is a matter of public record and your details will appear on the government’s Individual Insolvency Register and are available for anyone who chooses to check.
If you are struggling with your debts, it’s really important to know that you’re not on your own. You can speak to a debt advisor about your situation, and they’ll be able to advise you on the best course of action.
by Christine WalshBack to blog home