The road back from bankruptcy

Bankruptcy can be scary – you may be worried about how it’ll affect your day-to-day life, loved ones and financial future. But if you’re struggling with debt, bankruptcy can be a turning point. It gives you a chance to get the help you need, and to work towards a debt-free life.

What is bankruptcy?

Bankruptcy is a legal status for people who’re unable to repay the money they owe. You can only be made bankrupt if you have debts over £5,000, and it’s generally seen as a last resort – for example, you might consider a Debt Relief Order (DRO) or an Individual Voluntary Agreement (IVA) first.

How does bankruptcy work?

When you’re declared bankrupt, the value of your possessions is usually shared out among those you owe money to. This can include your house, car, leisure equipment and jewellery – everything except the essentials. Depending on your income, you’ll also be asked to make payments towards your debt for up to three years.

Sounds gloomy, but there’s a silver lining. Once you’re declared bankrupt, you won’t have the pressure of dealing with creditors anymore. Lenders will also have to stop most types of court action against you. And, most relieving of all, you will usually be ‘discharged’ – in other words, freed from your debts – after one year.

How can bankruptcy happen?

You can be made bankrupt in two ways:

• A lender can apply to make you bankrupt, even if you don’t want them to. They may do this to recover money you owe them.

• You can declare bankruptcy yourself. In England and Wales, you can apply online through the Government’s website. Bankruptcies are made through the courts in Northern Ireland and the AIB (Accountant in Bankruptcy) in Scotland. If you’re thinking of applying for bankruptcy, you should first speak to a free, independent debt adviser (such as your local Citizens Advice or National Debtline) or a reputable solicitor, accountant, insolvency practitioner or financial adviser.

How will bankruptcy affect my life?

Bankruptcy is an extreme measure and can affect your life in several ways:

• You may lose valuable possessions. However, you can keep basic items needed for living and working (this might include your car if you can’t do your job without it). Note that you may need to trade in these items for cheaper versions. While it’s upsetting to lose your belongings, just remember what you’re working towards: a life free of debt.
• Your bankruptcy will be public knowledge. It’ll appear in the London Gazette (or the Belfast Gazette if your bankruptcy is processed in Northern Ireland) and on the Insolvency Register. Worrying what the neighbours will think? You probably don’t need to – unless there’s a high level of public concern about your bankruptcy, it’s unlikely to be covered by local or national newspapers.
• Your bank accounts may be closed. This can make day-to-day life difficult, since bank accounts are used for everything from receiving your salary to paying bills. But you may be able to open a basic bank account. These are designed for people with bad credit, and enable you to store and pay money without accessing overdraft facilities.
• The courts may take away your passport. This is called being impounded, but it’s unlikely to happen to you unless the courts believe you’ll travel abroad to sell your possessions.

It can be a stressful experience. From doing the paperwork to telling friends, bankruptcy can be a difficult process emotionally. That said, some people find a weight has been lifted from their shoulders, as bankruptcy lets them turn over a new leaf.

Will my bankruptcy affect my spouse and others?

If you’re financially connected to someone, declaring bankruptcy could negatively impact how a lender views them. Examples of a financial connection include joint bank accounts or a shared mortgage. If you’re not connected to someone financially, their credit information shouldn’t be affected – even if you live with them.

If your partner or spouse jointly owns property or possessions with you, this could be sold to help repay your debts. They’ll usually be given the chance to buy out your share or agree a value for the item. If the item is sold, the money will be split between your partner and creditors.

How long will bankruptcy affect my credit file?

Your bankruptcy will appear on your credit report for six years, or until you’re discharged if this takes longer. Lenders look at your credit profile when you apply for credit, so you’ll probably struggle to borrow money while bankrupt. What’s more, you must tell lenders about your bankruptcy when applying to borrow over £500. Employers and landlords may ask to look at your credit information before employing you or letting you rent property.

If you do find someone who’ll lend money to you, they may charge you a higher interest rate as they’ll see you as a high-risk customer. Even after your bankruptcy has been cleared from your profile, lenders can ask if you’ve ever been bankrupt (this is common when applying for a mortgage).

You can see what’s on your credit profile by getting your Experian Credit Report.

Who will see that I’m bankrupt?

A number of organisations and third parties can be told about your bankruptcy, including:

• Your creditors, banks and building societies
• Your utility suppliers (e.g. energy, water and gas)
• Professional bodies that you’re a member of
• Your local authority and Citizen’s Advice
• Your landlord

How can I rebuild my credit file after bankruptcy?

The good news is that bankruptcy isn’t the end of the road financially. Here are some steps you can take in the short term:

• Order a copy of your statutory credit report (from Experian and the other two main credit reference agencies) to ensure your credit details are correct
• Add a short statement to your report explaining why you got into debt (e.g. illness or redundancy)
• Register for the electoral roll at your current address
• Update all personal details (such as addresses) on your credit profile

In the long term, it’s important to show lenders that you can borrow money responsibly. You can do this by using and repaying credit. But before you do so, you need to be 100% sure you can afford and meet the repayments.

• Consider credit designed for people with low credit ratings. This usually means low limits and high interest rates. You may be able to improve your rating by using this type of credit for small purchases (such as groceries) and repaying the money in full and on time.
• Space out your applications. Each application for credit will leave a mark on your credit report, so aim to apply no more than once every three months.
• Check your eligibility before you apply for credit. Doing this can help you reduce your chances of being rejected and having to make multiple applications. You can see your eligibility for credit cards and personal loans when you create a free Experian account.
• Once you’re back on the straight and narrow, make sure you stay that way by keeping a close watch on your finances. One way to do this is to sign up to CreditExpert. This paid subscription can help you monitor and improve your credit profile, ensuring you’re always in control of your finances.