Bankruptcy – what do you need to know?
Disclaimer – this is not a complete guide, and is valid as at June 2021. Policies, requirements and impact may change so please check the Government guidance for further information. Please get independent financial advice before undertaking a life changing decision.
Leaseholders trapped in the Building Safety Crisis, facing unaffordable, unfair bills for their home may consider handing their keys back to the Bank/Lending institution and walking away declaring bankruptcy.
Before you decide to go down this route, please consider the following:
- Will you be able to clear the debt another way? Use this resource to access help
- When you first apply, this must be assessed by an adjudicator at the Insolvency service and there is an initial fee of £680 (adjudicator fee of £130, deposit of £550 will be returned if application rejected).
- There are other fees associated with the process. Expect to pay; an admin fee of £1,990, general fee of £6,000, trustee fee usually 15% upon sale of assets and cost of selling assets (i.e. estate agent fees).
- If Bankruptcy is granted, a trustee is appointed to manage your case and;
- You will be sent the bankruptcy order
- You may need to be interviewed
- Your assets can be taken to pay debt (you can keep items needed for work, household items like clothing) but your bank accounts, cheque books, credit cards will be frozen. You will have access to money for urgent requirements (i.e. food), partner’s share of money in joint accounts. Your pension contributions will remain, however if you are in receipt of pension payments this will be included in your income upon assessment to pay off the debt. Please see point 9 regarding your home.
- You will be bound by bankruptcy restrictions (i.e. you cannot borrow more than £500 without alerting lender of your bankruptcy status, create/manage/be director of a company, manage business under a different name, work as an insolvency practioner). Your income will be restricted by an Income Payments Agreement (IPA) arrangement and can last up to 3 years so you may be asked to contribute monthly towards your debt from any spare income.
- It is important to note that if you commit a bankruptcy offence (i.e. break the restrictions) you may be given a court requested Bankruptcy Restriction Order (BRO).
- Bankruptcy should not affect your employment however you may encounter issues if your role involves financial matters, is in a regulated profession, is in insolvency, carries a license in the gambling industry. Professions such as law, accountancy, financial services and banking may disqualify your membership. It is worth checking your professional bodies individual policies and perhaps writing using our template for support and awareness. Please see this guidance for more information.
- Under a BRO, there is a greater likelihood of losing the license to practise within professional bodies. Please consult citizens advice for more information.
- Your details will be published in the Individual Insolvency Register
- As an individual, Bankruptcy ends when you are discharged by the adjudicator, and is usually 12 months, although this can be longer.
- You will need to request a confirmation letter to prove it has ended (fee if you applied through courts, free otherwise).
- 3 months after your discharge, the registers will be updated. However you need to apply to both Land Charges and HM Land Registry to have your bankruptcy entry removed from any properties you still own after paying your debts.
- Bankruptcy can stay on your credit record for up to 6 years.
- There are debts that you will not be discharged from
- debts due to fraud
- debts owed under family proceedings
- personal injury damages
- debts excluded from bankruptcy (i.e. a Student Loan)
- Your home may be sold if there is any equity, and if this equity is over £1,000, you may also be giving up legal ownership.
- If the trustee is unable to sell your home within 3 years, it will be transferred back to you. It is worth noting any costs will be accrued in the return of property. This can be service charges/rent/waking watches/increased insurance.
- If you are the only owner, a bankruptcy restriction is added to your property in the land register.
- If you own with a partner, a restriction is added to the land registry. However if your partner owns the property you can apply for this to be removed.
- If you are in rented accommodation, your landlord may be notified of your bankruptcy status.
- You can apply to cancel a bankruptcy if
- the bankruptcy order should not have been made
- all your debts and bankruptcy fees have been paid or secured (guaranteed) by a third party
- you‘ve made an Individual Voluntary Arrangement with your creditors to pay all or part of your debts.
How does your bankruptcy affect your partner?
The answer here depends on whether you and your partner jointly own the asset of value. The Trustee appointed to your case by the Insolvency Service may have an interest in it.
The key thing to note is that in bankruptcy debts cannot be passed to someone else. Aside from joint ownership, if you have fallen into arrears on council tax; the council will make your partner fully responsible for the arrears.
When it comes to your belongings, both your and your partners goods can be seized. Therefore it is your responsibility to prove what belongs to your partner not you.
Your partner’s employment status should not be affected, and his/her income is not included in the Income assessment. For your Income Payment Arrangement where you pay into your bankruptcy for 3 years, you will need to show details of partner’s income to calculate the percentage of household bills you must pay.
Your partner’s credit rating will not be affected, especially where there is no financial link between you both. It may be worth checking with the credit reference agencies to ensure there are no links to another person’s file such as with joint loans/bank accounts.
Mortgage applications will be impacted if you and your partner want to purchase another property. If your partner will be the sole owner of the mortgage, there should be no impact. Where you want to buy as joint owners, your bankruptcy status will affect the application.
If your partner already owns a property where you are not on the title deeds and have no interest, the Trustee will not take the property into their assessments. There are certain exceptions to this, such as;
- if you’ve made a significant contribution to the house (i.e. through an extension or paid a sum off the mortgage)
- if you have joint accounts or pay the higher percentage of the household bills
- if you have a joint mortgage or are named on the title deeds
- if you have any other beneficial interest in the property
If your partner rents property, your bankruptcy will not affect them unless it is mentioned in the tenancy agreement.
Where you and a partner jointly own a property, in event of bankruptcy your share will be transferred to the Trustee, your partner’s share will not be at risk. To protect the share, your partner may wish to buy your share of the property using their own funds.
Operate separate bank accounts and ensure your partner’s salary isn’t paid into yours, as this will be available to the Trustee under bankruptcy. Any financial products/services your partner applies for in the future can be affected by your credit status.
This agreement would state the ownership of belongings such as money, assets, property and explains how these are divided in the event of the marriage breaking down. It is important to be aware that Prenuptial agreements are not always valid in bankruptcy, and current cases are testing the law.