The basic idea behind bankruptcy is that you spend a certain period of time paying as much as you can towards your creditors.  When that period ends, (most of) your debts are wiped off so that you can make a fresh start.

The basics of bankruptcy

One of the key principles of bankruptcy is that your creditors can only take what you have.  This means that you can expect to lose any valuable assets you own, especially your home unless you can demonstrate that you need them to earn an income.  It also means that the onus will be on you to think carefully about all your needs and what they are likely to cost and then to be able to justify these to the Official Receiver (OR) who will handle your case.

The OR’s job is to get a fair deal for your creditors while still leaving you with a decent, basic, standard of living.  On the one hand, this means that they are only going to sign off on an expense if you can show you really need it.  On the other hand, if you can show you really need it, then you are very likely to get it.

Deciding what you really need

You should be able to end insurance policies for assets you have ceased to own however, you may actually have a greater need for insurance coverage than you did previously because you will no longer be able to “self-insure” to the same extent as you will not be able to hold significant savings.  In simple terms, this means you should ensure that anything you feel you need to protect at all costs (e.g. pets) is comprehensively insured, especially if the cost of not having insurance could be very high.

The issue of home insurance

If you own a home you will usually be expected to provide your creditors with the value of the equity in it.  If you own a home jointly with someone else, then it is only your share of the equity that matters.  In some cases, satisfying your creditors may mean selling the home on the open market.  In others, however, it may be possible for someone to buy you out of your share of the equity in the property (at its current market value) so that this can be given to your creditors (via the official process).

You would then be able to go on living in your home, but you will not technically own it and it is highly unlikely that you will be able to own it during the bankruptcy period.  This can create a “round peg in a square hole” situation when it comes to getting buildings insurance for your home, so speaking to an insurance broker might be helpful.

If you can’t stay in your own home, then you will probably have to rent (or stay with family/friends) as you will not be able to get a mortgage.  This means that you won’t usually need buildings insurance, but you may still need home-contents insurance.

Issues with insurance in bankruptcy

Understandably, bankruptcy has a horrendous impact on your credit rating, which can have all sorts of implications for your life in general and your finances in particular.  In terms of insurance, it can mean that you are asked to pay an entire year’s worth of cover up-front or if you are allowed to pay in instalments, be charged extra for the privilege.  It can also mean that your premiums are raised.  Ideally, you want to look into your options before you actually go bankrupt and if possible get qualified advice, for example from an insurance broker.

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