When it comes to bankruptcy, the last thing you want is to be baffled by financial jargon. Take a look at what bankruptcy means for you in simple terms.
Let’s be honest, bankruptcy can be a pretty scary word. But, in some circumstances, it could be the best financial move to make. If you’re thinking about filing for bankruptcy, sit tight and get to grips with our back-to-basics look at all the important stuff you need to know.
If you’ve got debts hanging over your head, bankruptcy is one of a handful of your options to sort it out. However, to apply for bankruptcy, you must be unable to pay back your debts - if you can, you’ll have to look into other alternatives, like a debt consolidation loan or a debt relief order, for example.
Bankruptcy works two ways. By this, we mean you can either apply for bankruptcy yourself, or, a lender you owe money to can apply to make you bankrupt - regardless of whether you want them to or not. For a lender to do this though, you must owe them at least £5,000.
As a general rule, it’s recommended you only consider bankruptcy if you have unsecured debts of £20,000 or more.
What causes bankruptcy?
People find themselves facing bankruptcy for a number of reasons. For some, it’s the result of spending that simply got out of control, to the point they can’t repay it. For others, it could be a case of what was controlled spending, but a change in circumstance - the loss of a partner or losing a job, for example - means they’re no longer able to afford their repayments.
How does bankruptcy work?
First things first, you need to fill in this online government form. Before you get started, make sure you have the following information to hand:
Council tax rates
Rent or mortgage information
Details of all your debts.
Once you’ve completed the online form, you’ll be told within 28 days whether your application has been accepted or rejected.
If you’re accepted and therefore officially declared bankrupt, two things will happen:
1. Your bank accounts will be frozen; and
2. Any non-essential possessions may be sold to help cover the cost of your debt(s).
If your non-essential assets don’t cover your debt, the outstanding balance will be wiped clear, unless your salary is considered high enough to make monthly payments. If it is, you could be roped into these payments for up to three years.
How much does it cost?
Filing for bankruptcy isn’t cheap. If you’re in England or Wales it’ll set you back £680 and if you live in Northern Ireland it’s slightly less: £669.
If you live in Scotland, the bankruptcy process is a little different. Firstly, you can only apply to be bankrupt if you’ve received money advice. And secondly, the costs are significantly less. If you’re applying through the Full Administration, it’ll cost you £200 and if you’re applying via the Minimal Asset Route it’ll be £90.
Bankruptcy: the impact
Bankruptcy can affect you in a number of ways. Some in the short-term, some in the medium-term, and some in the long-term. So, let’s take a look at the ‘how’:
If, after being declared bankrupt, you try to borrow £500 or more from any lender, you must be up front and tell them you’re bankrupt.
Bankruptcy stays on your credit history for six years. This means all future lenders can see it when you apply for credit, which could reduce your odds of being accepted. Plus, if you are accepted, it can impact the interest rate you’re given - and not for the better.
Generally speaking, bankruptcy lasts for one year, during which time you’re not allowed to take out credit in the form of a personal loan or credit card.
In some cases, you may struggle to qualify for a standard current account that offers overdraft and cheque book facilities during the 12 months after bankruptcy too. If your wage is paid electronically, or you have direct debits for things like household bills, this could be particularly problematic. You could, however, always look to open a basic bank account without those facilities instead.
It’s perhaps not as well-known, but some insurers (like the AA) actually require you to tell them about your (or anyone else on your policy’s) bankruptcy too. When it comes to renew, this information could result in a higher quote.
On top of that, you’re less likely to be able to pay for your insurance in monthly instalments because the provider in question will have less certainty you’ll stick to your payment schedule.
Is bankruptcy right for you?
Filing for bankruptcy isn’t a decision that should be taken lightly. If you’re not sure if it’s the right move for you or would like more information on the subject before you take the next step, it might be a good idea to talk to someone in the know, like StepChange or Citizens Advice, first.
Disclaimer: All information and links are correct at the time of publishing.