Using bankruptcy as a solution to serious debt problems

Bankruptcy is a ‘last resort’ solution in cases of very serious debt problems, and can be brought on by any creditor owed more than £750, or can be entered into by making a bankruptcy order yourself. Except for certain exemptions, if you enter into bankruptcy your assets will be sold and the proceeds used to cover part or all of your debt.

The aim of bankruptcy is to completely wind up your financial affairs in order to realise all value in your assets, pay off as much of your debt as possible, and essentially ‘start again’.

Certain assets are excluded from the bankruptcy and include:

Ordinary household contents
A modest motor vehicle
A residential tenancy
Items needed for your trade or vocation, for example tools
Any money you hold in pension funds

Although any equity you have in a property will need to be realised as part of the bankruptcy, the bankruptcy trustee will be able to advise on how to avoid a forced sale, such as selling your share in the property to a partner or family. If you own a house with no equity, you will still be advised to sell your share, as if the equity in the house rises in subsequent years, even after your discharge from bankruptcy, the trustee could then seek the full value for your interest.

If you have surplus income (after living expenses for yourself and dependents), you will be required to make contributions, usually determined by the court. If your circumstances change for the better during your bankruptcy, such as an inheritance, then this money will also be available to your creditors.

Providing you have not been made bankrupt before, your bankruptcy will end (you will be ‘discharged’) after 12 months, after which you will be free from debt and no further action can be brought by your creditors, although you may still have to make payments from your income for a further 3 years. There are certain exceptions to this, for example you may still owe any unpaid court fines and student loans. The trustee will still be able to take action to sell your house if equity rises significantly, and the trustee will retain this right indefinitely.

The bankruptcy will remain on record at the Land Registry and with credit reference agencies, although you will no longer be declared bankrupt.

How does bankruptcy differ from an IVA?

An IVA can be considered in basic terms as a compromise between an informal debt management arrangement with creditors and bankruptcy. Bankruptcy differs from an IVA in that:

In bankruptcy, your assets (such as your house and car) will need to be sold, and control of these assets will be passed over to the bankruptcy trustee.

You will not be able to run a business or hold public office during the bankruptcy.

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