The consequences of bankruptcy can be devastating, as the Post Office scandal has laid bare. As dramatised in the ITV hit Mr Bates vs the Post Office, several former Post Office workers were forced to go bankrupt after they struggled to cover the fictional financial losses out of their own pocket or fight in court to clear their name. But thousands of people file for bankruptcy every month 2,466 in November alone up by 21 pc in just one year. And for many, it is their only option and can be a chance for those who are struggling with debts to wipe the slate clean.
Here’s what you should you do if you are about to go bankrupt and how can you stop it blighting your life
If you find yourself struggling to repay your debts, bankruptcy can be a last resort.
‘Bankruptcy is usually suitable if someone has little hope of repaying their debts in a reasonable amount of time and can be a good option to give someone a fresh start,’ says Jonathan Chesterman, Debt Advice Policy Manager at StepChange.
‘However, there are also serious implications that come with being declared bankrupt so it’s not a decision that can be taken lightly.’
Polly Arrowsmith, 56, is a qualified accountant who worked on some insolvency cases before she herself was made bankrupt
The ITV hit Mr Bates vs the Post Office, which dramatised the scandal
If you are declared bankrupt, then your possessions are sold off except essentials and the proceeds are used to pay your creditors. You may also need to make payments out of your income towards your debts. The silver lining is that you will stop being hounded by your creditors they will deal with the insolvency practitioner who is appointed to your case instead and, after 12 months, you should be discharged from bankruptcy free from most debts.
However, it can be a traumatic experience. Polly Arrowsmith, 56 from London, is a qualified accountant who worked on some insolvency cases before she herself was made bankrupt in September 2020.
‘There is a huge stigma attached to bankruptcy in the UK. I ran a business that turned over £60million in 15 years. I had ten properties that had equity of £3million. That is a success in most people’s terms. If I add that I was bankrupt, this null and voids all this success,’ says Polly. ‘I know several people who committed suicide upon personal bankruptcy.’
There are three ways you can become bankrupt. You can declare yourself bankrupt if you cannot pay your debts. Your creditors can apply to have you made bankrupt because you owe them £5,000 or more. An insolvency practitioner can declare you bankrupt if you break the terms of an individual voluntary arrangement (IVA).
You can apply to be made bankrupt online at gov.uk/apply-for-bankruptcy. There is a £680 fee. But think hard before you start the process.
‘Before entering into any solution for dealing with your debts, bankruptcy or otherwise, you should always seek specialist, free and impartial debt advice from a provider like StepChange to assess your options and what may or may not be the best course of action for your particular situation,’ says Chesterman.
Once you are declared bankrupt you will have to fill in forms detailing your assets and may be called for an interview. ‘Be truthful. It’s the same importance as a police interview,’ says Polly. ‘Any errors would be classed as fraud.’
Your assets are then sold to pay your creditors. This can be anything valued at over £5,000 from your home to your car to your personal possessions. You can only keep essentials such as items you need for your job – and you may even have to trade these in for cheaper alternatives.
Even jointly held assets could be forfeited. For example, if you joint own your home with your spouse or partner it could still be sold to clear your debts unless they can afford to buy out your share. Once the property is sold your partner will receive their share of the proceeds with the rest going towards your debts.
Your bank account and all funds will be frozen, your passport may be seized, you could even find yourself uninsured.
The drama told the real-life story of former Post Office workers forced to go bankrupt
‘Chubb immediately stopped insuring me,’ says Polly. ‘They had insured me for 15 years. And my life insurance premiums doubled.’
You will also find you cannot get credit. During your bankruptcy you can’t apply to borrow more than £500 without telling the lender you are bankrupt, but it could continue to be a problem for years afterwards. That’s because your bankruptcy will stay on your credit file for six years, damaging your credit rating. It can also affect your partner’s ability to borrow too. If you are financially connected via a joint account or joint mortgage, then your bankruptcy will be flagged on their credit file too.
‘In certain cases, bankruptcy may impact your job, such as if you are in the armed forces, police, a solicitor, or a range of other professions,’ says Chesterman. You may find you lose your job if you work in a position of trust check your employment contract.
After 12 months you should be discharged from your bankruptcy, but this can be extended if you haven’t cooperated. At this stage most of your debts will be written off and some restrictions end you can become a company director again and can apply for credit. However, some of the ordeal may continue. For example, your official receiver has three years from the date of your bankruptcy application to decide what to do with your home. This could mean they sell it, or they can apply a charge with the land registry, so they get a cut of the proceeds if you sell or remortgage.
At this point there are things you can do to improve your credit rating even though your bankruptcy will still be logged on it.
Look at your credit report you can order if for free from Experian, Equifax and Transunion. Make sure all your details are correct and add a short paragraph to your report explaining why you got into debt. It is also worth registering to vote, this improves your credit rating as lenders see is as a sign of stability.
When six years have passed the details of your bankruptcy will be removed from your credit file. Now you could consider applying for a credit card designed for people with poor credit ratings. Use the card modestly and repay the balance in full each month to show you can be trusted to handle debt sensibly.
If you are struggling with your debts always speak to your lender. They may be able to help you come up with an affordable repayment scheme. Contact a debt advisor for help too. Free, impartial advice is available from Citizens Advice, National Debtline or Stepchange. You may be able to apply for the Breathing Space scheme which grants you 60 days when your creditors can’t contact you, make you pay or add interest to your debts. There are lots of options to consider with bankruptcy as the last resort. The most important thing is to get help.
You can contact Citizens Advice on 0800 144 8848 or go to www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy. To contact National Debtline, go to: nationaldebtline.org or 0808 808 4000 or Stepchange at 0800 138 1111 or www.stepchange.org/how-we-help/bankruptcy.
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