The real life consequences of being made bankrupt

UK consumers are very familiar with debt. In just one month this year, collectively we took out more than a billion pounds worth of consumer debt. According to the Office for National Statistics, 12% of people say they always, or most of the time, run out of money at the end of the week or month and need a loan or credit card just to get to the next pay day. As a result, debts can be swiftly accumulated, often to the point where there is no prospect of paying them off. When that happens, bankruptcy becomes a very real possibility.

Bankruptcy and the British public

In the first quarter of 2018 there were 4,188 bankruptcies, which made up 15% of the total number of 27,388 individual insolvencies in the period. Individual Voluntary Arrangements (IVAs) are by far the most popular type of individual insolvency – there were 16,676 during the first quarter of 2018. These are closely followed by debt relief orders, which made up 24% of the total numbers in the first three months of this year. In comparison with the last quarter of 2017, the number of bankruptcies rose almost 10%.

What does it mean to go bankrupt?

If you’re unable to pay your debts then any creditor to whom you owe more than £5,000 can apply to have you declared bankrupt. Bankruptcy is only usually recommended if your unsecured debts are more than £20,000 – for lower figures something like an IVA is usually more appropriate, if your creditors agree.

When bankruptcy happens, any assets you have will transfer to a trustee in bankruptcy who will sell off what they can to make payments to your creditors. The other debts will be discharged 12 months after the bankruptcy order has been made. This effectively means that none of the creditors to whom you owe those debts can try to collect on them. There are some exceptions to this, including recent taxes and child support payments. While this may sound like a great solution – essentially wiping the slate clean – in fact there are some other, much less appealing consequences to going bankrupt that give many people pause for thought.

Your credit score will plummet. Going bankrupt is one of the most damaging influences on your credit score. The purpose of a credit score is to demonstrate your ability to manage credit and being unable to make repayments on debts to the point at which you become bankrupt shows a complete inability to manage credit. So, if you do go bankrupt it’s unlikely you will be able to borrow for some time afterwards. It is possible to rebuild your credit score but you will need to be patient. Even after the bankruptcy has been discharged, it will remain on your credit file for five years.
You won’t be able to get even basic credit. Without a good credit score it’s no surprise that credit cards and loans simply won’t be accessible. However, you also won’t be able to apply for a current account where the account has an overdraft or a chequebook. You may also have trouble renting, as landlords will carry out credit checks, and monthly payments for something like insurance won’t be possible so all payments will have to be made up front.
Your situation becomes a matter for public record. All your personal financial information, as well as the fact that you’re going bankrupt, becomes data that anyone can access. Although really sensitive information – such as your birth date or tax payer ID numbers – are protected, anyone can discover the financial trouble you’re in.
Possessions can be taken. There are ways to exempt your property from being available to the bankruptcy trustee to sell and if the cost of selling an item would be higher than the potential profit then the sale usually isn’t pursued. However, if you do go bankrupt you may find that possessions, such as a car or electronic equipment are sold to raise money to pay your creditors.
Your assets will be frozen. Bankruptcy essentially makes your financial affairs an open book and takes the control away from you. When you are declared bankrupt your accounts will be frozen while the trustee in bankruptcy works out how to proceed.
You may still end up having to make payments. If your income is deemed high enough then you may find yourself making repayments on the debts that were owed – for up to three years.
Some employers won’t employ a bankrupt. Depending on your profession you may struggle to obtain (or keep) a job. This is particularly so in professions that carry a lot of responsibility, for example law or accountancy.

How to address your credit problems – use our “Ultimate Guide to Improving Your Credit Rating” to help you get back on track.