Bankruptcy is often a last resort when debts accumulate and become impossible to pay. When you apply for bankruptcy, a trustee is usually appointed to handle any valuable assets you may have and these are used to pay off any outstanding debts listed in the bankruptcy order. Creditors must apply to your trustee for the money owed. Any further debts outside of the order must be paid separately by you.
You are usually freed from your debts after one year, but your bankruptcy will stay in credit reference agencies’ records for six years thereafter. Any insurance providers you may have and your landlord, your bank, mortgage and pension providers will be informed of your bankruptcy.
Individuals, businesses and partnerships are all eligible to apply for bankruptcy through the courts, but it can have a knock on effect on your financial situation. Here are some of the things that can be affected by declaring yourself bankrupt.
Your Credit Rating
After being declared bankrupt, you must hand over any credit cards, cheque books or bank cards to the trustee. Your bank may freeze any accounts you have and may not allow you to open any new ones with them after becoming bankrupt. You should make alternative arrangements for any outstanding direct debits or standing orders you may have on your accounts. You can open a basic bank account to manage money that does not involve any credit checks.
Any overdrafts or loans you may have with your bank will become part of the bankruptcy order. As your credit file will list your bankruptcy for six years, it will be more difficult to obtain any future loans, overdrafts or credit cards, as your credit rating will be poor.
Your Home
If you are a homeowner, your home can be sold and the money used to pay your outstanding debts. Your share of the property’s value is transferred to your trustee after mortgages and secured loans are paid. The court may order you to sell your home, but you may be able to delay its sale if there are exceptional circumstances or the value of your share after its sale would be less than £1,000. If you rent your home, you may be eligible for housing benefit or a Local Housing Allowance if you are struggling to keep up with your rent.
Your Pension
Your pension may be affected if it is not approved by HM Revenue, but you can ask your trustee if there is any way to protect it. If you are receiving a pension and are declared bankrupt, you may have to pay your debts using some money from the pension. If it is an HM Revenue approved pension, it should not be affected by bankruptcy.
Your Employment
Some companies do not allow you to take employment with them if you have been declared bankrupt. These include law organisations and others regulated by the Financial Services Authority. There are some roles, like company director, that you may not be allowed to take. However, once you are freed from bankruptcy this shouldn’t be an issue. If you are a business that has gone bankrupt, you will normally have to close your establishment and dismiss employees.
As an alternative to bankruptcy, an IVA may be a better option. An Individual Voluntary Arrangement is an arrangement between you and all of the creditors you owe where you pay back slightly less overall than your original debt. This allows you to make affordable monthly payments and clear your debts without going bankrupt.
This guest post was written by Saul on behalf of IVA Expert.