What does it mean to be declared bankrupt?
If you are considering extreme measures to get out of a financial mess, TRICIA PHILLIPS looks at what the long-term consequences might be for your future
MOST people only tend to hear about bankruptcy when it concerns celebrities.
Famously, Katie Price was declared bankrupt in 2019, but famous faces are far from alone in struggling with debts at the moment. If you’re under pressure, it’s worth understanding whether there’s any risk it will end in bankruptcy, and how you can avoid it.
The Office for National Statistics says that more than one in 10 people under the age of 50 have missed at least one direct debit or standing order in the past month, almost one in 20 people are behind on the rent or mortgage, or behind on energy bills.
Meanwhile, Bank of England statistics show that the banks are expecting the number of people in arrears on credit cards, loans and mortgages to rise this year.
The good news is that if you’re running into debt problems, there’s a long journey between missing a payment and being declared bankrupt. Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “If you’re struggling to pay, whether you’ve missed several payments, or just come close to missing one, the first step is to speak to companies you owe money to.
“If you explain you’ve run into difficulties, they should allow you to make up what you owe in a way you can afford. They may also be able to move you onto a cheaper tariff, or agree to suspend charges while you get back on top of your payments.”
Alternatives to bankruptcy
If things are worse than missing a couple of payments, seek free help immediately from a debt charity such as StepChange (stepchange. org/0800 138 1111) or Citizens
Advice (citizensadvice.org.uk/0800 144 8848) and find out your options. You may be able to set up a debt management plan, where a debt adviser makes a formal repayment plan with those you owe money to.
In Scotland, you can use the debt arrangement scheme – a debt management plan backed by the government. A money adviser decides if the scheme is right for you. Interest, fees and charges are frozen and people you owe money to can’t take legal action against you.
In England and Wales a debt adviser can apply for breathing space – for 60 days you won’t get interest or charges added to debt, you won’t be chased by people you owe money to, and they can’t take enforcement action. You’ll need to make repayments during the period, but it will ease the pressure.
If you can’t afford to repay, your options depend partly on the types of debts. If it’s the result of a county court judgment (CCJ) or a High Court judgment (HCJ) for debts under £5,000, you can get an administration order. The court decides how much you need to repay and for how long. You’ll pay a fee each time you make a payment – which can add up to 10% of the debt.
Alternatively, an individual voluntary arrangement may work. These are set up through an insolvency practitioner, who decides what you can afford to pay, and for how long, and makes an agreement with those you owe. There’s a set up fee and fees with every payment – which can add up. If you miss payments you can be made bankrupt.
If you owe less than £30,000 you may qualify for a debt relief order. You cannot have more than £75 a month in spare income, or own much in assets or property. You apply through a debt adviser, and it costs £90. You’ll face borrowing restrictions, usually lasting 12 months, and a DRO stays on your credit report for six years, making it difficult to borrow.
If none of these are right for you, or you’ve tried them and found repayments impossible, it’s worth understanding bankruptcy
What is bankruptcy?
Some people declare themselves bankrupt while others will be declared bankrupt by organisations they owe at least £5,000 to. It comes with a fee of £680.
You can apply to become bankrupt online via gov.uk. Applications are checked by an adjudicator at the Insolvency Service, who may have questions, but once satisfied they issue a bankruptcy order.
An official receiver interviews you and helps you through the process, acting as your trustee. You’ll have to hand over bank cards, credit cards and cheque books, and your accounts will be frozen. The trustee may free up cash for essentials such as food.
Your bank will decide whether you can keep using your account. Your trustee works out whether you have surplus income each month that should go into repaying the debt.
Your assets may be used to pay your debts – although you can usually keep things you need for work, plus household items like clothes and furniture. You can also keep money in a pension – although if you’re receiving a pension it will count as part of your income.
Your home may be sold, or you could be required to give up legal ownership, and landlords are informed about bankruptcy. You’ll also face restrictions – many relate to running a business, and you can’t borrow more than £500 without explaining that you’re bankrupt.
Restrictions end when you’re ‘discharged,’ usually after 12 months. However, you may have to keep making monthly payments for three years. Also, bankruptcy stays on your credit record for six years, making it difficult to borrow in future.
Sarah Coles says: “The idea is to ensure that you can get back to zero, even if there’s no possible way for you to repay all of your debts, and that any money you can afford is shared fairly between people you owe cash to.
“The process is damaging, and it will have a long-lasting impact on your finances. It’s one reason why bankruptcy is often considered as a last resort when nothing else will solve your debt problems.”
Bankruptcy stays on your credit record for six years so it’ll be hard to borrow