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Today we’re tackling a topic that’s often misunderstood: bankruptcy. For people facing financial difficulties, it can be a stressful and anxious time. When you add the word ‘bankruptcy’ into the mix, it can bring waves of fear and uncertainty with it. In reality, it can be a way for many people to break free from the chains of debt and gain financial freedom.
In this blog, we’ll explore some pros and cons of bankruptcy. Hopefully, this will dispel some bankruptcy myths you might have, and help you make an informed decision about whether it’s the right option for you.
Advantages of bankruptcy
1. You can become debt free in a short period of time
One advantage of bankruptcy is that the process can be fairly quick; the bankruptcy period typically lasts around twelve months, but your debts are dealt with as soon as the bankruptcy application has been approved. Although it’s not a life sentence, bankruptcy can still affect you for a few years afterwards; we’ve listed some of these disadvantages further down in the blog for you to read and digest.
2. It’s a good option for those who don’t qualify for a DRO
If you’re unable to pay back the debts you owe when they’re due, this means you’re insolvent. If you don’t meet the criteria for a Debt Relief Order (DRO), then bankruptcy may be an appropriate debt solution for you.
A positive aspect of bankruptcy is that it clears your debts, even if they’re not listed on your application. This means that if you have outstanding debts but can’t find the paperwork or information about them, they’ll be cleared in the bankruptcy process.
3. It can give you a financial fresh start
A key advantage of bankruptcy is the freedom you have to start afresh. The people who CAP support often experience feeling weightless when they break free from the chains of debt. Nathan and Hayley both found themselves facing bankruptcy, but CAP supported them through the process. Read their reflections on their experiences:
I think the bankruptcy was a blessing in disguise. Now I don’t want credit. I don’t want to borrow. I’m happy with what I’ve got.
Nathan, CAP client
The bankruptcy had been granted. That made me really happy and it felt like a weight had been lifted.
Hayley, CAP client
Disadvantages of bankruptcy
1. The application is expensive
You have to pay an administrative fee to apply for bankruptcy:
In England and Wales, it costs £680 per person to apply for bankruptcy (payable to the Insolvency Service).
In Northern Ireland, the fee is £690 per person (payable to the Official Receiver and the Courts). You may also have to pay a small fee (around £7) to a solicitor on top of this.
2. It’ll stay on your credit report for six years
Although the initial bankruptcy period is short (usually a year), the bankruptcy will still appear on your credit report for six years. It’ll also be listed in a couple of other places:
the Register of Insolvencies for the duration of your bankruptcy period
an online journal called the Gazette indefinitely
Although these are online and accessible by the public, most people are not aware of them, so it’s unlikely that anybody you know will find out about your bankruptcy this way.
Notices of bankruptcy used to be published in local and national newspapers, but this is no longer standard practice.
3. Your home could be affected
One disadvantage of bankruptcy is that your home could be affected. If you own your home and there’s equity in the property (the amount you owe on the mortgage is less than the amount you would get if you sold it), the Official Receiver (the person who administers the bankruptcy) will want to realise this. There are a number of ways that they can do this. They could put a charging order on the property, which means that when you sell your home, they would get a share of the money.
Another option is that they could look at whether there is someone, perhaps a friend or a family member, who would be willing to buy the equity off you or pay the equivalent amount into your bankruptcy. But, if neither of these are possible, they could look to sell the property. This will usually be a last resort, as doing this would incur additional legal costs and mean there was less money for the Official Receiver.
If you have little or no equity in your home currently, but potentially could have in the future, the Official Receiver can wait for up to three years before deciding what to do.
If you live in rented housing, you could be affected if you have a certain type of tenancy or if you have rent arrears (being behind on your rent payments).
Some tenancy agreements contain an insolvency clause, which means that you could be evicted if you go through bankruptcy.
If you have rent arrears dated from before your bankruptcy application, then your landlord can’t get them back, as they’re included in the bankruptcy. If you have rent arrears after the bankruptcy period, the landlord could take action to get the arrears back or take steps to evict you from the property.
4. Some debts are unaffected by bankruptcy
There are some debts that are not cleared in bankruptcy. This means that you would have to pay them back anyway. These include magistrates’ court fines, student loans, social fund loans, fraudulent debts, child maintenance (CSA) arrears, criminal fines, and mortgages if you want to keep your home.
5. It can cause some restrictions on jobs and taking out credit
Another potential disadvantage of bankruptcy is that it could impact your job. There are some jobs or roles you can’t do if you become bankrupt: accountants, solicitors, directors of limited companies, charity trustees, estate agents and school governors may be all affected. Other jobs that are regulated by a professional body may also be affected.
There will also be restrictions on taking out further credit while your bankruptcy is in place, which can make it harder to apply for a mortgage, for example.
How do I know if bankruptcy is right for me?
Bankruptcy is just one of many routes out of debt. Whether it’s the right option for you will depend on your financial circumstances. If you’d like to explore the options that are available, simply check below to find debt help in your area. We don’t charge a penny to get help from us, and our local CAP Debt Coaches will talk you through the various options available to you.