If you have been declared bankrupt or if you are considering applying for bankruptcy, you need to know what happens afterwards, the options are available to you and what happens after discharge.
What Happens After Bankruptcy?
Bankruptcy is a legal process that clears the debts you can’t pay and usually lasts for a year. During this period, your non-essential assets can be sold and used to pay off those who you owe money to, also known as creditors. Non-essential assets are monies above your basic requirements or items of significant value such as televisions, jewellery and any cars that aren’t required for you to get to work or care for someone.
Anything that is considered to be a non-essential item can be collected by the Official Receiver (OR) unless you can genuinely prove that any particular items would make your everyday life more difficult and more expensive.
If there is equity in your property, where the amount you owe on the property is less than its value, you may have to sell it in order to release the equity as part of a contribution to your creditors. However, if you owe more than the value of the property itself, (negative equity) or if a friend or family member is willing to purchase the equity, you won’t lose your home.
Unfortunately, you won’t be able to be a company director until you are discharged from bankruptcy and are legally prohibited from managing, forming or promoting a limited company unless you have a court order that explicitly says you can do so.
Your Bank Account
Once you have been declared bankrupt, your bank account may immediately be frozen. In some cases, you might find you are unable to use this bank account again and may struggle to get another.
When your account is frozen, your bank will speak with the OR and then decide whether or not to let you keep your current account, switch to a basic account with no overdraft or they may ask you to bank elsewhere. If you have been asked to bank elsewhere, you can open a new bank account, but bear in mind that they may ask if you are bankrupt and could refuse to let you bank with them. Alternatively, if they agree, they may only offer you a basic account.
If no banks agree to let you open an account with them, you have the following options:
- Basic bank account
- Post Office card account
- Prepaid debit card
As mentioned previously, basic bank accounts don’t have an overdraft or credit facilities and you will not be given a chequebook. However, you will be able to receive wages, benefits, pensions and tax credit. Post Office card accounts allow you to receive benefit, state pension, and tax payment credits without checking your credit record. However, you cannot receive housing benefits, workplace pensions or wages.
A prepaid debit card is an option for when you wish to make payments to others, though there is a limit to how much you can put on the card. This card allows you to pay bills, transfer money and take money out of an ATM but will usually charge a fee for transactions.
There are no credit cards available to individuals who have become bankrupt until they are discharged, however, it may still be difficult to get one after you’ve been discharged due to a low credit score. Capital One and Barclaycard offer ‘rebuilding’ cards for applicants 12 months after their bankruptcy. When you open a new bank account, it is not necessary for you to disclose this information to the OR unless they specifically ask you, in which case you must. You must also make them aware of an any money in your account that exceeds your reasonable living expense.
Credit and Loans after Bankruptcy
Bankruptcy will severely affect your credit score and therefore your ability to get a loan or other type of credit. Prior to your bankruptcy discharge, it is against the law for you to borrow over £500 from any without telling them you’re bankrupt. Whilst you don’t need to tell them if you’re borrowing any less than this, they will usually find out anyway by credit checking you.
The details of your bankruptcy remain on your credit file for six years, so even after you have been discharged and have no limit on the amount you can borrow, you will likely find it difficult to get credit or a loan (e.g. a mortgage) as many lenders refuse or charge a higher rate of interest as your bankruptcy makes you a bigger risk. If you’re looking to get a mortgage, speak with a range of lenders as they have different policies and some consider people with low credit scores.
If you fail to co-operate or the official receiver discovers that you have acted dishonestly or irresponsibly, the restrictions of your bankruptcy can be extended for up to 15 years should they apply for either a Bankruptcy Restriction Undertaking (BRU) or Bankruptcy Restriction Order (BRU).
Bankruptcy Discharge
Bankruptcy normally lasts for 12 months, after which you’ll automatically be discharged from your bankruptcy, meaning you’ll no longer be legally responsible for repaying any debts that were included under your bankruptcy. However, you will still have to pay some debts such as any criminal fines, child maintenance arrears, student loans and TV licence.
You may still have to make some payments after your bankruptcy if you are responsible for paying income payment arrangements (IPAs). This is a payment set up by your OR if you have any leftover money after you have paid your essential household costs. They start before your discharge and last for three years. In England and Wales, you won’t be sent formal evidence or notification when you are discharged from bankruptcy, however, it is possible for you to get proof by requesting a confirmation letter with the discharge date and certificate of discharge for a fee of £70 via the government website.
Bankruptcy Register
Details of any bankruptcy in England and Wales can be found for free by searching for the Individual Insolvency Register which lists the name, address and occupation of the individual who has been declared bankrupt, the date of the bankruptcy order and the Official Receiver’s details.
It usually takes three months after your discharge for your details to be removed from the bankruptcy register. These details will also be on your credit file for 6 years and will severely impact your credit score.
Have You Been Declared Bankrupt or Are You Considering Bankruptcy?
Becoming bankrupt isn’t always the best solution for everyone and can have a severe impact on your credit rating, home, employment and ability to get a loan. If you have a debt problem and are considering bankruptcy or insolvency as a method of solving it, please don’t hesitate to get in touch with a member of our team at Ryans for expert advice on the best options available for your circumstances.
If it is necessary for your business to go into administration, receivership, or insolvency, we can advise and assist you, but the best advice is to come for regular business health checks so we can identify potential difficulties at an early stage and recommend appropriate courses of action in plenty of time.