Using Bankruptcy to Get Out of Debt 

Are you worried about your debts and thinking about taking the step towards bankruptcy? You are not alone in this. Each month, over 170,000 people visit our site looking for guidance on debt matters.

This guide will help you understand bankruptcy better. We’ll cover:

•  What bankruptcy really is
•  How one becomes bankrupt
•  How to work out if bankruptcy is the right choice for you
•  How to apply for bankruptcy and what it might cost
•  The way bankruptcy could affect your life and your credit file

We, at MoneyNerd, know what it feels like to be worried about money; some of us have been in the same tough spot as you. We know that debt can be scary, but there is always a way to sort it out.

This guide will help you learn more about bankruptcy and whether it could be a good way for you to get out of debt. So, let’s get started.

Declaring Yourself Bankrupt

If you have debts of at least £5,000 you can apply to have yourself declared bankrupt. If you decide to do this you will have to apply to the Insolvency Service. An adjudicator from the Insolvency Service will decide whether or not to accept your application.

There is an application fee which is currently £680. This fee can be paid in instalments, but you cannot declare yourself bankrupt until the full fee has been paid. This means that for many people, bankruptcy is not an option because they cannot afford the application fee.

If your application is successful, a Bankruptcy Order will be granted and you will receive written confirmation that this has happened. Within two weeks of getting that confirmation, the Official Receiver will write to you explaining what you need to know and what you need to do.

Your assets will be taken from you, although you will be able to keep any items needed for your job such as the tools of your trade provided they do not exceed a certain amount. You will also be able to keep certain household items such as clothing, bedding and furniture, although if you have particularly expensive items such as a luxury leather sofa you may be required to sell those items and replace them with something cheaper.

You may need to be able to keep your car or motorcycle if you need it for a specific reason such as commuting to work. However, if your vehicle is particularly valuable you will probably have to sell it and replace it with a cheaper vehicle.

You will also be required to hand over control of your bank accounts although you may be allowed to keep some money to buy essentials such as food. You can keep any money you have put into your pension but any pension payments you are receiving will be treated as income. If your income is sufficient you may be required to contribute towards your debts for up to three years after you have declared yourself bankrupt.

There are a number of rules which apply if you own your home. If you are in this position you should take advice to find out how your home ownership will be affected.

You must co-operate with the people that are managing your bankruptcy.

If a Creditor Petitions for Your Bankruptcy

If one of your lenders petitions to make you bankrupt the process is similar although they will be responsible for the fee rather than you.

They will need to show that they have tried to get you to repay your debt and that there are no alternative routes for them to take. If you want to avoid bankruptcy you will have 21 days from getting their statutory demand in which you can repay the debt or try to come to an arrangement with the lender to repay the debt in instalments.

There may also be an opportunity to have the statutory demand cancelled. An example would be where the amount that you owe is less than £5,000.

Restrictions

If you are declared bankrupt there are a number of restrictions that will apply to you.

You won’t be able to borrow more than £500 unless you tell the lender that you are bankrupt, but if you are declared bankrupt it is unlikely that anyone will lend you money anyway.

More importantly, unless you have the court’s permission you won’t be able to create, promote or manage a company and you won’t be able to be a company director. If you are a member of certain professions your bankruptcy may also have an impact as certain professions do not allow bankrupt people to practice.

If you are not already a UK citizen, bankruptcy will affect any application you make for UK citizenship. It may also mean that you are unable to sponsor someone else who wants to enter the UK.

These restrictions last until your bankruptcy ends, although they can be extended if you have acted dishonestly or have failed to co-operate with the people managing your bankruptcy. Failure to comply with these restrictions is a criminal offence.

Are there any other options?

Deciding how to tackle your debt is a very personal decision and you certainly can’t get the answer through a simple blog post.
It’s made worse by the strong opinions you’ll often find online.

The best option is to get help from a debt expert to find out all your options and see which is right for you.

I’ve partnered with The Debt Advice Service and you can access their expert support by filling out the short form below.

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Will People Find Out?

If you are declared bankrupt, the Insolvency Service will record this fact on the Insolvency Register and anyone can access this.

The Insolvency Service is also required to put a notice in the London Gazette. In certain circumstances you can ask them not to include your address in this notice. An example of such circumstances would be where there was a very real risk of violence against you if people found out where you were living.

Although in the past there was also a requirement to put a notice in your local newspaper, that is no longer the case. There is nothing to stop your local newspaper reporting on your bankruptcy anyway, but unless you are newsworthy because you are a prominent local businessman or a celebrity it is unlikely that this would happen.

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Alternative Debt Solutions

Bankruptcy should only really be considered as a final resort because it is a fairly consequential way to resolve debt issues. It is one of the options that you can consider if you’re in financial difficulty, but there are other options that you may want to consider first.

Some of the alternatives that you can consider are:

• a Debt Management Plan
• a Debt Relief Order
• an Individual Voluntary Arrangement

Each of these alternatives have their good and bad points so you should explore your options before making a final decision. If you are considering bankruptcy it is worth taking advice to see which route is the best route to take.