“We should not judge people by their peak of excellence; but by the distance they have travelled from the point where they started.”
Henry Ward Beecher
What is the attraction of bankruptcy?
When the bankruptcy order is over you can make a fresh start – in most cases this will be after a year.
- the pressure is taken off you because you don’t have to deal with your creditors
- you’re allowed to keep certain things known as ‘exempt goods’, for example everyday household items, tools you need to do your job, a car if you need it to get to work or you’re a carer and it’s not worth more than £2,000
- you’re allowed to keep a reasonable amount from your income to live on
- if you have to make payments from your income, this can only be for 3 years – you won’t have to make payments if your only income is from welfare benefits
- creditors have to stop most types of court action to get their money back following a bankruptcy order
- you won’t have to pay back the debts that bankruptcy covers
Why would you want to try and avoid bankruptcy?
To apply to go bankrupt you’ll need to pay a £680 fee. Furthermore:
- if your income is high enough, you’ll be asked to make payments towards your debts for 3 years
- it will be more difficult to take out credit while you’re bankrupt and your credit rating will be affected for 6 years
- if you own your home, it might have to be sold – this depends on how much it’s worth after any amounts secured on it are repaid
- if you rent your home, your landlord could end your tenancy
- some of your possessions might have to be sold if they are not ‘exempt goods’
- some jobs don’t let people who have been made bankrupt carry on working
- if you own a business it might be closed down and the assets sold off
- going bankrupt can affect your immigration status
- your bankruptcy will be published publicly (although if you’re worried you or your family might be the victims of violence, you can go to court to get an order so your address details aren’t given out)
- you could have a bankruptcy restriction order made against you lasting up to 15 years which will restrict your financial affairs
What happens at the end of bankruptcy?
Your bankruptcy will normally end after a year – this is known as ‘discharge’. After discharge you won’t have to repay the debts covered by the bankruptcy.
However you will still have to pay some debts like court fines and loans from the Student Loans Company.
The informal or pre-insolvency option
It is often better, if possible, to avoid bankruptcy but making an informal or pre-insolvency arrangement.
- There is more room for flexibility in negotiations yielding a better result
- A tailored settlement can be adapted to suit all parties
- A better return for all creditors involved
- Reduced costs
- Issues are usually dealt with on a consensual basis
- Legal proceedings and associated costs are avoided
- Relationships between creditors can be preserved
What about your pension(s)?
If you have one or more pension plans, becoming bankrupt may affect your pension rights. This will depend on:
- what type of pension it is
- whether you’re receiving an income from your pension yet
- whether you’ll be entitled to receive payments from your pension within 4 years of becoming bankrupt
If you’re not receiving income from your pension
If you’re not going to receive a lump sum or get regular income from your pension within 4 years of becoming bankrupt, the bankruptcy trustee can’t access any of your pension pot.
If you do receive income from your pension
If you get an income from a pension, these payments are treated as income by the bankruptcy trustee. This means you could be asked to pay some or all of the money towards your debts, if you have more than enough income to cover your day-to-day living costs. This would normally happen under an income payments agreement or income payments order.
If your only income is from a state pension and/or other benefits such as pension credits, you won’t be asked to pay any of this towards your debts.
You might want to choose not to receive payments from your pension fund in order to stop the trustee claiming them.
Links to further information
- UK Government notes on Applying to become bankrupt
- Christians Against Poverty (CAP)
- Money Advice Service notes on Critical Illness Insurance
This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.
If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.