Bankruptcy is one of the most feared terms in the financial industry. Everyone worries about being made bankrupt, but what does this actually mean? In this post, we’ll run through what happens when you are made bankrupt and why some people choose to declare bankruptcy themselves.
What is bankruptcy?
Bankruptcy is seen as a last resort for anyone struggling to pay off debts. When you’re officially made bankrupt, then all of your bank accounts are frozen, and your assets are sold off to help pay all your debts. If you still have money to pay, then it will be wiped out unless you manage to earn enough money that allows you to make regular monthly payments. You will remain bankrupt for a whole year, but it’s still present on your credit file for six years.
What happens when you are made bankrupt?
The process of being made bankrupt can be a very stressful time for you. It starts by declaring bankruptcy, and this is done in one of two ways. As mentioned earlier, you can either declare it yourself or the person you owe money to can try and force you into it as a way of getting their money. If you owe over £5,000 to one entity, then they can make applications to try and declare you as bankrupt. This doesn’t mean that everyone who owes £5,000 should be made bankrupt as there are usually alternative methods of paying off this debt. Often, people with over £20,000 are the ones advised to consider bankruptcy.
To be made bankrupt, you need to fill in an online application form and provide plenty of evidence. This includes showing your payslips, various statements, council tax, mortgages, bills, and a list of all your debts. There is also a fee to pay, which is £655 for anyone living in England and Wales. The fee for Northern Irish residents is £647, while bankruptcy in Scotland follows a different process. It’s possible to pay this fee in instalments or as a lump sum, depending on what’s best for you. Then, there will be a 28-day waiting period where your application is reviewed, and a decision is made as to whether or not you will receive a bankruptcy order.
When you are made bankrupt, it will have a significant impact on your life. There’s no chance of you being able to take out any loans or apply for credit cards in the year that you’re officially declared bankrupt. Similarly, it’s impossible to open a regular bank account that grants you an overdraft or entitles you to a chequebook. Instead, you’ll have to open something called a basic bank account, which just lets you store money and make cash withdrawals. It will also be much harder to find insurance providers that accept you or estate agents that allow you to rent a home. A lot of bankrupt people end up living with family until the twelve-month period ends.
What happens after bankruptcy?
After the twelve-month period of bankruptcy, it will be slightly easier to find a loan or apply for a credit card. Banks are also more likely to consider you if you need to open a new account. However, it will still be much harder for you to get what you want – compared to an average individual that wasn’t made bankrupt. You will have to search long and hard to find lenders or credit card companies that are willing to accept your applications. Some banks still don’t want your business, which means you need to keep looking around until you find some that do.
But, a further five years after the initial period, you will have the bankruptcy wiped from your credit history, which means things should start to return to normal.
Is bankruptcy recommended?
As we said near the beginning of this post, bankruptcy is a last resort for people struggling with debts. It’s not something that’s recommended as it has a massive impact on your life for many years. All of your assets will be taken from you and sold – which means you’ll have your home repossessed and you will see no money from the sale. So, if you’re in a lot of debt, then you should look at all other alternatives of paying your creditors. Seek out debt advice to ensure you go through as many possibilities as you can to try and wipe out your debt.
If you’ve tried everything to fix your bad credit issues, and there’s no improvement, then being made bankrupt could be the only option you have left. In this scenario – and only in this scenario – it’s seen as potentially beneficial as you can get rid of debt and start afresh.