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Bankruptcy: this is how it works

Bankruptcy: this is how it works
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If you’re seriously struggling with debt, you may have considered filing for bankruptcy. Bankruptcy is a form of insolvency that could get your debts being written off but it can have significant consequences on your day-to-day life. So, before making a decision it’s really important to understand what impact it could have on your finances in the future. Here, we breakdown everything you need to know about bankruptcy, how it works and whether It’s right for your circumstances.  

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What is bankruptcy?

Bankruptcy is a legal procedure that can be used if you’re unable to repay debts of over £5,000.

Being declared bankrupt means that all of your unsecured debts, such as credit cards and loans will be written off.

Any assets that you own, including property or vehicles, will be sold to repay your creditors.

Bankruptcy: how it works

The bankruptcy process begins when either you make an application online or a creditor makes a formal claim through the courts.  

Once you have been declared bankrupt any assets that you own, such as a house, car or jewellery, will be sold and their value will be used to pay your creditors.

You will be able to keep certain items such as clothing, bedding and furniture. These are known as ‘exempt goods,’ which are necessary for you to live and work.

Being declared bankrupt will also result in your bank accounts being frozen. Depending on your income, you may be asked to make payments towards your debts for up to three years.

The bankruptcy process lasts for 12 months. After this time you will be ‘discharged,’ meaning that all of your unsecured debts will be cleared.

You will receive a copy of the bankruptcy order and will have to follow certain restrictions.

These include not being able to borrow more than £500 without informing your lender that you’re bankrupt.

Details of your bankruptcy will be published on the individual insolvency register (IIR) which can be accessed by the public.

You can apply to stop your details from being published if you think it might put your safety at risk.

When should you file for bankruptcy?

Bankruptcy may be a suitable option if you have no way of repaying debts of over £5,000.  

If you owe less than £5,000 can keep up with repayments or your assets are worth more than your debt, bankruptcy may not be the best option for you.

As an alternative, it may be worth considering a debt relief order (DRO) or an individual voluntary arrangement (IVA).

It’s worth seeking independent, expert debt advice from charities such as StepChange or Citizens Advice to help you understand more about bankruptcy, how it works and whether It’s the right step for you.

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How do you file for bankruptcy?

In England and Wales, you can make an online application for bankruptcy to the Insolvency Service.

You will need to provide information about your debts, income and outgoings as well as letters you may have received from bailiffs or law enforcement agents.

An official adjudicator will review your application and decide whether you should be declared bankrupt within 28 days.

They may get in touch with you if more information is required for your case. If they contact you, they will need an additional 14 days to make a decision.

It costs £680 to make a bankruptcy application and you can opt to pay in instalments of as little as £5 if you can’t cover the full fee upfront.

The process for filing for bankruptcy is slightly different in Scotland and Northern Ireland.

If you live in Scotland, applications must be made to the Account in Bankruptcy.

Residents in Northern Ireland must complete two forms which you can get from the Bankruptcy and Chancery Division of the High Court of Belfast or the Insolvency Service

For more details, check out our guide on bankruptcy in the UK.

What happens after bankruptcy?

Although bankruptcy only lasts for 12 months, it can have significant long term consequences on your finances.

For example, your credit score (or credit rating) will be negatively affected for six years, which may make borrowing difficult.

Providers that are willing to lend you money are likely to apply high levels of interest as you will be classed as a high-risk customer.

It’s possible to try and improve your credit score by using a credit rebuilder credit card and clearing your balance each month to show that you a reliable borrower.

Another thing to consider is that bankruptcy does not apply to all debt. Things such as magistrates’ court fines, student loan repayments and debt with a secured charging order will still need to be paid by you.

If you’re worried about managing your outstanding debt, it’simportant to get help as soon as possible.

Charities such as National Debtline, PayPlan and Money Advice Service offer free debt advice to help you get your finances back on track.

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