Bankruptcy

Definition

Bankruptcy is the legal process of selling your assets to pay your creditors when you are unable to resolve outstanding debt. You can start the process yourself by declaring bankruptcy, or a creditor can apply to make you bankrupt (if you owe them £5000 or more).

How bankruptcy works

When you apply for bankruptcy you’ll be asked to provide a full list of your assets. These will then be placed under the control of a trustee, who will sell the items to repay your creditors.

Your bank account will also be frozen and any money will be claimed as an asset by the trustee. During this period, you are not allowed to use your bank, however, your trustee will be able to release funds for your daily living costs.

Depending on your employment circumstances, you may also be asked to make regular payments to your creditors from your income.

What belongings can I keep?

Most everyday household items such as clothes, bedding, and furniture are considered essential items and cannot be sold on. That being said, the trustee can sell them if they can be replaced with a suitable and cheaper alternative.

You can also keep items that are needed for work, for example, books, tools, or equipment.  However, any items which aren't fulling your basic home needs or required for work purposes can be sold. This can include antiques, jewellery, and leisure equipment.

If you are a homeowner your property can also be sold, but this is only in extreme cases when there is no other way to repay your creditors.

Being discharged from bankruptcy

Normally, you will be discharged from bankruptcy after 12 months. After this, your bankruptcy restrictions will no longer apply and most of your debts will be cleared. 

However, assets you owned during bankruptcy can still be used to pay back debts once your bankruptcy has ended.

It’s also worth noting that if you fail to co-operate with your trustee, your bankruptcy can be extended.

Will bankruptcy affect my credit score?

Bankruptcy is a sign you have encountered serious financial problems, therefore being made bankrupt will have a significant impact on your credit rating.

Once a bankruptcy order has been made, it will remain on your credit file for six years. During this time, you may find it difficult to be accepted for credit, as lenders will consider you are a greater risk to lend to.

Are there any advantages of filing for bankruptcy?

Bankruptcy can be worrying and upsetting, but there are sometimes benefits to filing for bankruptcy.

The main advantage is it provides an opportunity to clear your debts and make a fresh start. Plus, it can help relieve the pressure of dealing with your creditors, as this is handled by the trustee.

Also, in most cases, creditors are required to stop court action to get their money back once a bankruptcy order has been made.

However, bankruptcy can have very serious impacts, so if you’re struggling with debt we recommend discussing your options with a debt advisor first.