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What happens when you become bankrupt?
If you have debt problems, you may be thinking about the possibility of bankruptcy. It's important to understand what bankruptcy is, and what alternatives exist. Bankruptcy isn't permanent, so you may choose it as a way of clearing your debts and making a fresh start.
What is bankruptcy?
Bankruptcy is a legal status that usually lasts for a year (see 'How long does bankruptcy last' below) and can be a way of clearing debts you can't pay. When you're bankrupt, your non-essential assets (property and possessions) and excess income are used to pay off your creditors (those you owe money to). At the end of the bankruptcy period, most debts are 'discharged' (cancelled).
How do you become bankrupt?
A court can declare you bankrupt by issuing a 'bankruptcy order' after it's been presented with a 'bankruptcy petition'.
Filing your own bankruptcy petition
A form (a debtor's petition) can be downloaded from the Insolvency Service website or obtained from county courts with bankruptcy jurisdiction.
When completed the form should be taken to the county court nearest to you that has bankruptcy jurisdiction. A fee of £150 is payable, although this can be waived if you meet specific criteria, when you file the petition.
A deposit of £345, for the Official Receiver's work, is also payable at this time. This amount cannot be waived.
A creditor making you bankrupt
Your creditors can present a creditor's petition if you owe them an unsecured debt of over £750.
Once bankruptcy proceedings have started, you must co-operate fully even if it's a creditor's petition and you dispute their claim. If possible you should try to reach a settlement before the petition's due to be heard - doing it later can be difficult and expensive.
Alternatives to bankruptcy
Bankruptcy is a serious matter - you'll have to give up possessions of value and the interest in your home. However, you don't have to become bankrupt just because you're in debt. You can try to make arrangements with your creditors instead - including:
- informal agreements - you write to your creditors and try to agree a repayment timetable
- individual voluntary arrangements (IVAs) - an insolvency practitioner helps you negotiate repayment terms
- administration orders - a county court orders you to make payments to the court, which the court then distributes amongst your creditors
Where is a bankruptcy order made?
Bankruptcy petitions are usually presented in the High Court in London or at a county court near where you live or trade (although not all deal with bankruptcy petitions).
Who deals with your bankruptcy?
Official Receiver
An Official Receiver is appointed to protect your assets. They act as trustee of your bankruptcy affairs if you have no assets.
Insolvency practitioner
If you do have assets, an Insolvency Practitioner will be appointed to act as trustee and sell your assets to pay your creditors.
Once a bankruptcy order has been made against you, your creditors can no longer pursue you for payment. Payment becomes the responsibility of the trustee.
How bankruptcy affects you
Assets
Once you're bankrupt, the Official Receiver, or appointed trustee, can sell your assets to pay your creditors. However, certain goods aren't treated as assets for this purpose, for example:
- equipment you need for your work (eg, tools or vehicles)
- household items needed by you and your family (eg, clothing, bedding and furniture)
Earnings
The Official Receiver can look at your income (taking into account expenses such as your mortgage, rent and household bills) and decide if payments should be made to your creditors.
You may be asked to sign an 'income payments agreement' to pay fixed monthly instalments from your income for three years.
If you don't pay (or if you don't sign the agreement voluntarily), the Official Receiver can apply for an income payments order from the court to order you to pay - running for at least three years from the date of the order.
If your circumstances change, you'll need to tell the Official Receiver, so they can review these arrangements.
Ongoing commitments
You'll still have to meet ongoing commitments such as rent or debts incurred after you become bankrupt.
Your obligations when you're bankrupt
You must:
- give the Official Receiver details of your finances, assets and creditors
- look after your assets and hand them over to the Official Receiver with the relevant paperwork, such as bank statements and insurance policies
- tell your trustee (either the Official Receiver or insolvency practitioner) about any new assets or income during your bankruptcy
- stop using credit cards and bank or building society accounts
- not obtain credit over £500 without telling the creditor that you're bankrupt
- not make payments direct to your creditors (there are exceptions to this, such as mortgage arrears and outstanding child support payments)
You may also have to go to court and explain why you're in debt.
How long does bankruptcy last?
Bankruptcy normally lasts for one year. After this time, you'll be 'discharged' from your bankruptcy regardless of how much you still owe.
Your discharge could happen earlier if you co-operate fully with the Official Receiver. However, in a small number of cases and if you've behaved irresponsibly (eg, not cooperating), bankruptcy can last for much more than one year.
Where to get help and advice
If you're thinking about declaring yourself bankrupt or you're being threatened with bankruptcy, it's important to seek independent advice.
Several agencies offer free help, including the Citizens Advice Bureau, National Debtline and the Consumer Credit Counselling Service (CCCS).
Citizens Advice Bureau (CAB)
Your local CAB is a good starting point for free advice. They provide free information and advice on legal, financial and other problems. You can find your local CAB in the phone book or on the CAB website.
National Debtline
National Debtline offers free, confidential and independent help over the phone for people in England, Scotland and Wales. You can call their helpline on 0808 8084 000 between 9.00 am and 9.00 pm from Monday to Friday and from 9.30 am to 1.00 pm on Saturdays (24 hour voicemail). You can also email them.
Consumer Credit Counselling Service (CCCS)
The CCCS has a helpline providing free and impartial advice to people with debt problems. You can call their helpline on 0800 1381 111 between 8.00 am and 8.00 pm from Monday to Friday. You can also write to them.
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