When debt reaches an unmanageable level, the first option many people consider is bankruptcy. However, while this legal process can be used to help individuals regain control over their finances in the long run, there are a number of strings attached that must be seriously considered.
In this guide, we explore the legal meaning of bankruptcy and outline the short and long-term implications of taking this option. We also discuss a few different debt management options that should always be considered prior to declaring bankruptcy.
What is bankruptcy?
Bankruptcy is a legal process that can be triggered by an individual who has become unable to repay or adequately service their debts. The equivalent for people living in Scotland is called Sequestration. In the UK, you can either apply for bankruptcy voluntarily or be forced into it by your creditors. However, the process typically begins with a petition filed by the debtor.
To declare bankruptcy, you’ll need to apply through the Insolvency Register in England and Wales, or through the High Court in Northern Ireland. Applying for bankruptcy will require an initial fee of £680. You can pay this in instalments, but you’ll need to have paid the full amount before you submit your application. A decision on your application for bankruptcy will be made and communicated to you within 28 days.
Once you have declared bankruptcy, your assets may be used to repay your creditors. This can include properties and vehicles. Certain restrictions are also placed on those that enter into bankruptcy. We take a look at some of these in more detail below. However, key restrictions include:
- Obtaining credit over £500
- Acting as a company director, school governor, or sitting on the board of a charity
- Enlisting in the police or armed forces
- Working as a solicitor, estate agent, Insolvency Practitioner, or in local or national government
Bankruptcy is usually considered a last resort, meaning it’s important to consider alternatives before taking this step. However, for some, bankruptcy does represent the best opportunity for a fresh start, allowing them to rebuild their financial lives.
How long do bankruptcies last?
Arguably, the most important factor for those thinking about declaring bankruptcy need to consider is how long the status will impact their lives. In the UK, bankruptcy is not a permanent status. As a rule, UK bankruptcy lasts for a minimum of 12 months. During this time, you have all financial interactions closely monitored by an assigned ‘official receiver’ (OR) or trustee. ORs work for the Insolvency Service and handle bankruptcies from start to finish. As discussed above, during this period, you will be subject to a range of restrictions that impact everything from property ownership and access to credit to, in some cases, future employment opportunities.
It’s also worth noting that bankruptcies can last longer. Indeed, if you fail to fully cooperate with your official receiver or trustee, or actively break the conditions of your bankruptcy, your discharge may be delayed or postponed. This would involve living with the restrictions imposed by your bankruptcy for longer than a year.
Although the restrictions imposed by a bankruptcy do only typically last 12 months in the UK, it’s important to remember that the lasting consequences may linger for several more years. This is especially true when it comes to the health of your credit report and obtaining credit generally.
How long does bankruptcy stay on your credit report?
The simple answer is six years. Although a bankruptcy itself only lasts a year, the fact you declared bankruptcy remains on your credit report for six years from the date your OR confirms the bankruptcy officially began. This means your credit report will bear the mark during the 12 months you are living with your bankruptcy restrictions AND a further five years following your bankruptcy discharge.
Naturally, the presence of a bankruptcy on your credit report will impact your ability to obtain credit during this period. This is because a history of bankruptcy can signal to lenders that you are high risk, meaning any loan, credit card, or mortgage application made in this time may be rejected or come with very high interest rates.
Does bankruptcy affect employment?
In the vast majority of cases, bankruptcy should not directly impact your employment status. That being said, there are a number of exceptions we have touched on above. These typically involve professions in which a bankruptcy can be seen as a particularly high risk or even a conflict of interest.
For example, if you work in the banking or financial sector you may face consequences with your employer. Similarly, if you’re a member of the legal profession, or operate as a company director, charity trustee or school governor, you may have to stand down. Finally, joining the police or armed services is also typically off limits.
If you’re considering bankruptcy, it’s a good idea to check your employment contract and company handbook first to understand any potential implications. We would also advise being as transparent as possible with your employer about your situation. This could help to manage any concerns they may have. Depending on their response, you also may wish to strongly consider alternatives to bankruptcy prior to taking the plunge.
What is the alternative to bankruptcy?
Declaring bankruptcy is a very big decision. However, if you’re in a situation where you’re completely unable to repay your debts, it’s understandable that you may think it’s your only option.
Remember, before applying for bankruptcy, it’s important to think seriously about the extent of your financial situation and to weigh up the advantages and disadvantages of this option.
There actually might be other debt solutions you’re eligible for that could help you avoid some of the lasting consequences of bankruptcy we have discussed above. For this reason, before declaring bankruptcy, it’s vitally important you first explore alternative options in full and seek professional advice to ensure you’re making the best possible decision. Some of the debt solutions you may consider include:
Individual Voluntary Arrangement (IVA)
These legally binding agreements involve a monthly payment plan being put in place between you and all of your creditors. Managed by an assigned Insolvency Practitioner (IP), IVAs typically last between five and six years. If approved by your creditors, all interest and fees on debts are frozen and direct contact from creditors stops.
On top of this, IVAs also allow you to keep assets such as houses and cars. After the agreed upon period, if all terms and conditions of the IVA have been adhered to, all outstanding debts are usually written off. While an IVA is not always an appropriate solution, and may not even be approved by creditors, it is an option worth considering prior to bankruptcy.
Debt Management Plan (DMP)
DMPs are informal agreements between you and your creditors that allow you to make reduced monthly payments at a more realistic rate over an extended period of time, in order to clear your debts. Payments are usually determined following an assessment of your disposable income which accounts for your priority payments and living costs. Unlike IVAs, which can see debt written off, DMPs continue until you have fully repaid all debts. Once again, creditors are under no obligation to accept a DMP if they don’t want to accept reduced payments, or if they feel you could afford to pay more.