If bills are piling up and paying them seems like a far-off dream, it may be tempting to start thinking about filing for bankruptcy. But before you do, you need to strongly consider what the consequences will be. Bankruptcy is not a decision to be taken lightly and the ramifications can be significant.
If you’re typically a private person, then you should be prepared for every part of your finances to be put under intense scrutiny. Your name will also appear in the London Gazette and on the insolvency register as someone who has been declared bankrupt, so there’s also the personal and social embarrassment of your friends, family and even people you only know in passing potentially finding out. This article on the Citizen’s Advice website provides some good information about where details of your bankruptcy will appear.
Losing everything, including your home
When you declare bankruptcy, your property and anything else of any worth, such a vehicle or any collector’s items, will be sold to recoup some of the debt you owe. With the exception of anything deemed essential, if you have any other items of value, they will have to be sold too. So, for example, you can no longer lay claim to an expensive music system you own if all you use it for is listening to your favourite songs at the weekend. However, if you use that same system for paid DJ work or providing entertainment at parties, then it’s considered essential to your livelihood and you can’t be forced to sell it.
Even if you don’t own your home, you should check your tenancy agreement to ensure there isn’t a clause that your landlord could use to evict you if you go bankrupt. If there is, finding new rented accommodation will be more challenging for someone who is bankrupt.
No more bank accounts and credit cards
Once bankrupt, your bank accounts will be frozen and you will no longer have access to your credit or debit cards. While many people prefer to manage without credit cards, getting by without a bank account may be a lot trickier. All reputable employers will insist on paying wages into a bank account. You may be able to ask them to pay it into someone else’s account, but this can cause several problems. The benefits agency now pays all benefits into the claimant’s bank account too. In some cases, you may be able to open a basic account though.
If you have problems getting a basic bank account, your employer may want to know why you don’t have your own account and there’s nothing to stop the person whose account the wages are paid into from not passing the money onto you, for example, in the event of a relationship breakdown.
Bound by restrictions
Bankruptcy comes with a set of restrictions. For as long as your bankruptcy status lasts, you must tell any potential lender that you are bankrupt if you are requesting a loan of more than £500.
You can no longer act as a company director or create, manage or promote a company without written permission from the court. You must not manage a company under an alternative name without letting the people you do business with know you are bankrupt. You will not be able to work as a debt specialist either.
Breaking any of these restrictions will lead to prosecution.
Losing your job
You could lose your job, particularly if that job involves a high level of trust such as cash handling or handling people’s personal details. Some professions which you would no longer be able to work in are; the police, the armed forces, postal services, legal and accountancy. There is a more complete list of professions shown at the Step Change website here.
If unemployed already, finding work will become increasingly challenging.
If you have or are applying for immigration status, this could be affected by bankruptcy.
Your credit rating
Even after bankruptcy, it can take a long time to repair your tattered credit rating. It will remain on your credit report for anywhere between 7 and 10 years.
If and when you are able to apply for a new credit card, this is likely to be one with an extremely high APR. You will have to pay the full balance each month to avoid this interest. In some cases, there may be an annual fee too.
Rebuilding your credit rating can be a long and expensive process. Experian have some tips on building your credit score here, and this article at Growing Power discusses some of the less understood things that can impact your credit score.
You will always have to declare you were bankrupt when filling out forms that ask this question. This can affect job applications and the chances of being accepted for a mortgage. Insurance companies may refuse to insure you or insist you pay more for the privilege.
Declaring bankruptcy should only be a last resort, after considering these consequences carefully and speaking to a qualified professional to discuss other options, such as ways to way off your debt or other options available to you. The decision shouldn’t be taken lightly, and you should be prepared for the changes if you do decide to go ahead with declaring bankruptcy.