Find out the answers to many of the most common questions about bankruptcy in England and Wales. What are the implications if you go bankrupt and how will you be affected?
Contents
- Who can go bankrupt?
- How long will you be bankrupt for?
- How much does it cost to go bankrupt?
- What happens to your car in bankruptcy?
- What happens to your house?
- Can you have a bank account?
- Will your credit rating ever get better after bankruptcy?
- What is an Income Payment Agreement (IPA)?
- Can you be self employed if you go bankrupt?
Who can go bankrupt?
Almost anyone can go bankrupt. It doesn’t matter if you’re employed, self employed, not currently working or retired. It is also suitable regardless of age. Therefore, bankruptcy could be right for you.
Generally speaking, all of the unsecured debt you owe will be written off. This includes money owed to HMRC, benefits overpayments, utility arrears and CCJs.
There is no upper or lower limit to the amount of debt you can include. In other words, you can use this solution whether you owe just a few thousand pounds or many hundreds of thousands.
If appropriate, you can cancel your current debt solution (such as a Debt Management Plan or IVA) and switch to bankruptcy. This might be sensible if your current solution is not working for you.
How long will you be bankrupt for?
You will be bankrupt for just 12 months. After 1 year, you will be automatically discharged. This means that you are no longer a bankrupt person or subject the the restrictions of bankruptcy.
After you have covered all of your reasonable living expenses, you may have a surplus income. You will have to pay 100% of the surplus to the Official Receiver. This is called an Income Payment Agreement (IPA). If you get an IPA it will last for 3 years.
A record of your bankruptcy will show on your credit file for 6 years from the start date. Your credit rating will become poor because of this. However, after you are discharged, you can start to improve your credit score by taking some actions. For example, you can start using a credit repair credit card.
In rare cases, the Official Receiver can extend the length of your bankruptcy. This would normally only happen if you fail to respond to the Official Receiver’s requests for information.
How much does it cost to go bankrupt?
If you decide to go bankrupt, you will have to pay the standard Government application fee. In England and Wales the fee is currently £680.
Everyone has to pay the same amount. There is no discount if you are on a low income or on benefits.
You can pay in instalments of as little as £5. However, you will not be able to submit your application and go bankrupt until the fee is paid in full.
You are allowed to borrow the money you need to pay the fee. This could be from a family member or friend or – as a last resort – by using your credit card or overdraft facility.
What happens to your car in bankruptcy?
Given your car is worth £1500 or less, you will be allowed to keep it as long as you need it. If you don’t need it or it is your second vehicle, it is likely it will have to be handed over to the Official Receiver (OR).
If your vehicle is worth more than £1500, you can still keep it. However, a third party (family member or friend) would have to pay the difference. If you don’t have anyone who can raise the funds, the OR will sell it and give you £1500 to buy a replacement.
Where your car is on finance and the amount still owing is greater than the value, the OR will not be interested. This means that as long as you maintain your finance payments and the finance company agrees, you should be able to keep your vehicle.
You could sell your car before you go bankrupt as long as you get market value. The funds raised can then be used to buy a cheaper replacement and to cover other costs such as the application fee.
You may be allowed to keep a slightly more expensive vehicle if you are self employed and it is a tool of your trade. For example, a work van or a registered taxi.
What happens to your house?
When you go bankrupt, you don’t automatically have to sell your house. However, whether you will be able to keep it will depend on how much equity there is in it.
If there is no equity in your property, the Official Receiver (OR) has no financial interest in it. You are therefore likely to be able to keep it. Remember, you must keep paying the mortgage because it is a secured debt which is not written off.
One of the main issues with bankruptcy is if you do have equity in your home. This is because the OR has to realise your share. In other words, they have to get their hands on a cash sum equivalent to the value of your share.
You will have the option to raise the required funds from a family member or friend. But if if this is not possible, your property may have to be sold in order to release them.
Understanding how bankruptcy will affect your house is complicated. Because of this, you should get advice from us first before deciding whether it is the right option for you.
Can you have a bank account?
The good news is you are allowed to have a bank account while you are bankrupt. However, it must be a basic account.
A basic bank account will give you all the banking facilities you need to manage your money. For example, you get a debit card. In addition, you will have access to internet banking. Furthermore, you will be able to set up standing orders and direct debits as normal. However, the account will not give you access to any credit facilities.
If the account you are using at the moment is a current one, it will almost certainly be closed by the bank. You should therefore be prepared. Ideally open a new basic account and start using it before you submit your application.
Most banks are able to offer you a basic account. You can open one with your current bank or move to another. Generally speaking you should move if you have debts with your bank which will be included in your bankruptcy
Once you are bankrupt, you will manage your money and household expenses as normal. The Official Receiver does not have access to, or control over, your account.
Will your credit rating ever get better after bankruptcy?
The record of your bankruptcy will remain on your credit file for 6 years. After this, it will be deleted automatically. Your credit rating will then dramatically improve as a result.
However, you can take action to improve your credit score as soon as you are discharged (after 1 year).
Once you are discharged, one of the best things you can do is to start using a credit repair credit card. As long as you pay off the balance each month, you will avoid paying any interest charges. Furthermore, you will start to build up a pattern of responsible borrowing. Consequently, your credit score will start going up.
You will be able to get a mortgage after you go bankrupt. However, you should wait until the record has come off your credit file (after 6 years). Only then will you get access to the most competitive rates.
What is an Income Payment Agreement (IPA)?
An Income Payment Agreement is where you have to make a monthly payment towards your debts. Once in place, it lasts for 3 years. In other words, it continues after your bankruptcy itself has ended.
The Income Payment Team within the Official Receiver’s office will decide whether you will get an IPA or not.
First, they will do a review of your income and expenses budget. This will involve checking all your expenses against their guide to confirm they are reasonable. If any seem to high, they will ask to speak to you to see if they can be justified.
Once the review is complete, if they decide you have no surplus, you will not have to pay anything towards your debts each month (unless your income improves).
However, where they decide you do have a surplus, you will have to pay this to the OR month in the form of an IPA.
For this reason, it is vital that you complete your income and expenses budget correctly. Above all, your expenses budget must be accurate. If you get your figures wrong, it could result in you having to make a monthly payment you can’t afford.
Can you be self employed if you go bankrupt?
You are allowed to go bankrupt if you are self employed. You can continue to run your business after your bankruptcy starts.
There are a number of reasons why this can be a good solution if you run a business. Firstly, any tax debts the business owes to HMRC and other business related loans and debts are included and written off. Secondly, you will be allowed to keep any tools you need personally to carry out your work.
In addition, you will normally be able to keep your work vehicle even if it is worth more than £1500. However, it still can’t be of excessive value.
On the other hand, depending on the nature of your business, going bankrupt may have some significant implications.
If you use machinery or equipment, you are likely to have to pay the Official Receiver the equivalent of its value to keep it. In addition, where you lease premises, your landlord will have to be told and a new lease drawn up.
If you work for yourself, our self employed bankruptcy service is tailored specifically for you. We will ensure you are aware of all the implications for your business so that it can continue running smoothly.
Written by James Falla
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What we can do
Assistance with going Bankrupt
- Application form completed correctly
- Preparation for Official Receiver interview
- Ongoing 12 month support
Self Employed Bankruptcy
- Business income and expenses forecast
- Bank account advice
- On-going support with 3 line accounts
Switch from IVA to Bankruptcy
- Help with cancelling IVA
- Support through bankruptcy process
- On-going support during bankruptcy
Support if Already Bankrupt
- Completion of PIQB questionnaire
- Preparation for OR interview
- Assistance with OR info requests