Bankruptcy is a straight-forward legal process that will take your finances out of your hands and allow you to securely pay back as much money as you can within a 12 month period, after which your debts will be written off and you will be free to start again - subject to a few restrictions.
Bankruptcy is the best way to get out of a severe financial crisis and many people express huge relief when they do it. However, it is not necessarily an easy or pleasant process to go through so before you register it's important to find out as much as you can about your obligations as a bankrupt individual and the impact this might have on your future life.
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What is bankruptcy?
Bankruptcy is a legal process for getting out of debt. It is the most extreme option available and it should only be chosen when all other methods of debt relief have failed.
Getting into personal debt can be a steep, slippery slope. The simple fact is that money is easy to spend, things are expensive, and borrowing can often seem like a quick and easy solution for low funds. Unfortunately, borrowing is a huge risk and financial situations can change suddenly. Illness, job loss, economic downturn and big life changes can mean that all of a sudden you have no money to pay all of those debts back.
When this happens, you must look for other ways to raise money. There are a number of options - for example, you could try downsizing your home, moving to a cheaper area, taking on an extra job, cutting back on expenses, selling your valuables, or coming to an arrangement with your creditors. If your efforts still aren't enough to satisfy them, then you may be forced to file for bankruptcy at a court (if your creditors haven't filed you for bankruptcy already).
As soon as you become bankrupt, someone else, known as an Official Receiver (OR), will handle all of your finances. The OR will organise the sale of your assets and distribute the money fairly between all of your creditors. During the period of bankruptcy, your creditors will not be able to contact you. All repayments during this time will be handled by your OR.
At the end of the maximum 12 month bankruptcy period, all of your debts will be written off and you'll be free to start from scratch, subject to a few restrictions.
Step-by-step guide to bankruptcy
The idea of declaring yourself bankrupt can seem very daunting at first, but it doesn't have to be. Going to court is not as scary as it sounds. You will not have to stand in a dock or be subjected to public humiliation - you will simply be asked to take your papers to a registrar or judge to be reviewed and signed.
Here is a step-by-step guide to bankruptcy so you'll know exactly what to expect should you decide to begin the process...
Step 1 - File for bankruptcy
Filing for bankruptcy is a very straight forward process in the UK. Anyone in the UK can file for bankruptcy. The only requirement is that you owe more than £750.
All you have to do is fill out two forms and take them to either a county court in your local area, or the high court in London:
- Debtor's Bankruptcy Petition Form 6.27
- Statement of Affairs (Debtor's Petition).
You can either download and print these forms from the Internet, go to a court to pick them up, or ask the court to send them to you through the post.
In these forms you will have to give personal details and specify why you need to declare yourself as bankrupt. This might mean describing relationship breakdowns, redundancy, illness, or any other personal reason for your debts.
Step 2 - Find the money to pay your bankruptcy fee
Unfortunately - given the financial circumstances of people who declare themselves bankrupt, becoming bankrupt is quite an expensive process. You will have to pay two fees:
- The Official Receiver's fee - £525
- The court fee - £175.
How do you raise funds for £700 when you're clearly already in quite a lot of debt? There are a few options you can try:
- Stop paying your creditors - this is acceptable as long as you are using the money to pay your bankruptcy fee and not putting it towards personal items.
- Borrow from family - if you tell your OR that you've borrowed money from family members then they may be reimbursed from the funds handled during the bankruptcy administration.
- Army personnel, police officers and some civil servants can sometimes get financial help from their unions.
- Sell an asset - as long as you have paid for it and it's not on credit. Make sure you keep the receipt as your OR will need proof of the amount you earned from the sale.
Step 3 - Find a court
Once you have filled in the correct forms and found money to pay for your bankruptcy, you will need to find a court. Usually, you will go to a county court local to where you live but occasionally you can visit one in your place of work. If you live in London then it is most likely that you will go to the high court.
If you're not sure which court to go to, phone your local county court and they will tell you what to do.
Once you find the right court, you may be able to arrive with your forms on the day, or you may be given an appointment for a later date.
Step 4 - Go to court
When you go to court you should dress smartly and come with all the documents you need. You will be told where to wait while your paperwork is reviewed by a registrar or judge. If there are any mistakes or ambiguities in the form you may be asked to clarify them. You will then be given a bankruptcy order number along with a time and date at which your OR will call you. Once done, you will be free to go home.
Step 5 - Official Receiver (OR) phone interview
Your OR phone interview will take place within two weeks of your court appointment. It should only take around 30-45 minutes. During this time you will be asked questions about your income and expenditure to decide whether you are in a position to pay anything towards the administration. Your OR will then draw up an Income Payment Agreement (IPA) between you and your creditors. This will outline the amount your OR thinks you can reasonably repay and the amount of time it will take. The IPA is a legally binding document and it can continue for up to three years after the start date.
What happens during bankruptcy?
Once you have declared yourself bankrupt and have an IPA arranged by your OR, you will not have to communicate with your creditors anymore. If any of them demand repayments, give them your bankruptcy order number and ask them to contact your OR if they have any problems.
During bankruptcy, your OR will make the following arrangements:
- Sale of your assets - all of your assets will be sold to raise funds for the repayment of your debts. This may include your home if you own one. If you have a family then this sale can be delayed for up to a year while you find a suitable place to relocate them.
- Income - your IPA will outline how much of your income you will need to put towards debt repayment. The amount you pay will depend on how much you need to buy essentials and pay bills.
During your 12 months of bankruptcy there will be a number of restrictions on what you can and cannot do:
- If you want to borrow £500 or more then you must tell the lender you are bankrupt.
- You cannot be a company director.
- You cannot promote or manage a company unless you have permission from the court.
- You cannot change the name of your business or manage a business with a different name without telling the people you do business with that you are bankrupt.
- You cannot work as an insolvency practitioner.
After the 12 months, these restrictions will be lifted.
What happens after bankruptcy?
As long as you cooperate with your OR and comply with all bankruptcy restrictions, you will be automatically discharged from bankruptcy after 12 months. To show proof of discharge you will need to:
- ask your OR for a confirmation letter - this won't cost you anything
- ask the court for a 'Certificate of Discharge' - this will cost you £70.
If you are discharged early then you will be notified through the post with a 'Notice of Discharge'.
You will need to send your credit reference agency a copy of your Certificate of Discharge so your credit file can be updated.
Once you have been discharged from bankruptcy, nothing you own can be claimed by your OR but assets they have already claimed will stay in their control.
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