For many, the stigma of bankruptcy prevents many from considering the option when faced with overwhelming debts.
This is a shame, as for many it could be the best option available, and bankruptcy could allow an individual to take the first steps towards a debt-free future. What is often overlooked though is life after a bankruptcy has gone through. It’s an important consideration to take into account when deciding how to manage debts, and deciding the right path for you.
The first considerations you must take into account when considering bankruptcy are the restrictions that it will place on you. These restrictions are a necessary part of getting creditors from pursuing you by declaring bankruptcy.
It is a criminal offence to break bankruptcy restrictions, so it’s important to honour them. The key thing during any bankruptcy is to co-operate with those that manage your case, and provide any information they request.
Restrictions: You cannot borrow more than £500 without informing the relevant lender that you are bankrupt. You cannot act as a company director whilst bankrupt.
Other jobs could be affected. If bankrupt, you can’t be employed in the armed forces or by the police. You cannot be a postman that handles mail possibly containing cheques. Certain jobs in the financial sector are also prohibited. Bankruptcy remains on your credit report/file for six years. Inevitably, this will restrict your ability to get further credit.
If you have your own business, bankruptcy will in all likelihood result in its closure by the official receiver, resulting in job losses and a sale of all its assets. You will not be able to create, manage or promote a company without the court’s permission.
Any spare income will go to your creditors. For up to three years, those that go through bankruptcy will have to make monthly payments if the money is available and the sale of assets hasn’t paid off debts.
Which leads us to the question of what constitutes “available money”? The terms of a bankruptcy will state that money can be retained by the bankrupt for reasonable domestic expenses, and thus not used to pay off creditors. Such expenses will include rent/mortgage payments, bills, council tax, food, toiletries, cleaning products, clothing and footwear and even your TV licence.
In addition, if you have been allowed to keep your motor vehicle (which would suggest a business need and/or a vehicle of low value), then the costs associated with that such as insurance and car tax, would come under acceptable expenses, as would a mobile phone, prescriptions, dental costs and childcare.
As you would expect, plenty of other of life’s expenses would not be permitted however. Money for alcohol, cigarettes or gambling should not be funded with creditors’ money, nor should satellite TV, excessive mortgage payments, charity payments, private healthcare insurance or certain pension contributions. Family holidays and pet-related costs (food and vet bills) will be considered individually, but generally guidelines will be strict. The most a family of four is likely to get for a holiday is £960.
Then there is the issue of bank accounts. Most banks will probably close down your bank account if you have declared bankruptcy, though it is possible to open a new one, and a basic bank account that would be available to bankrupts (and others) has been agreed by all the high-street banks and will come into effect this year. If declaring bankruptcy, the official receiver will take your bank cards, credit cards and any cheque books you may possess.
These restrictions should last 12 months (from the date the court made you bankrupt), at which point the bankruptcy is usually discharged. Failure to co-operate could delay this discharge, as could any dishonesty or carelessness. Individuals can check the Insolvency Register to check when their restrictions end. It should be updated within three months of your bankruptcy discharge. You must apply to both Land Charges and Land Registry to have your bankruptcy entry removed from any properties you still own after paying your debts.
Many of the common worries around declaring bankruptcy revolve around the effect on their credit rating and the fear of those around them finding out about the bankruptcy, and the associated shame they may feel as a result of this. The official receiver must advertise the bankruptcy order in the ‘London Gazette’ (an official publication with contains legal notices), but it is unlikely anyone you know will be reading that particular publication. In addition, the official receiver has discretion to advertise the order in any other way, if they think it is appropriate to do so, but this is uncommon.
As for credit, your bankruptcy may stay on your credit reference file for 6 years from the date of your bankruptcy as mentioned earlier, but those considering bankruptcy are likely to have a poor credit rating anyway, so the effect of bankruptcy on credit ratings is often negligible. Yes, your ability to obtain credit for subsequent years will be limited, but again, this was probably the case before bankruptcy, and is a sacrifice worth making in order to face debt problems head-on.
It will take years to rebuild your credit rating and getting a credit card is an important step. How soon you can get a new credit card depends on the card issuing company. They may lumber you with punitive terms and conditions – very limited credit, high fees and interest rates. You could apply for a secured credit card, which is secured against a savings account. If you don't pay your bills on time the credit card company will use the money in the savings account to cover them. A pre-paid credit card is another option. It means you will pay the card issuing company a sum of money in advance and you can use your credit card for up to that amount. This is a good way of keeping tabs on your spending.
As for your debts, when you’re discharged you’ll be released from most, but not all, of the debts you owed at the date of the bankruptcy. Debts that won’t be wiped from a bankruptcy include debts obtained via fraud, anything owned under family proceedings, damages for personal injuries and debts not included in the bankruptcy proceedings – student loans are a good example of such a debt.
I’ve written elsewhere about the consequences of bankruptcy. Click the relevant links to read about bankruptcy and assets, frequently-asked bankruptcy questions, or a personal view of life after bankruptcy.