Up until 1869, being in debt could land you a lengthy spell in prison and for long afterwards bankruptcy was to be feared for many reasons. Over a century and a half later, the word “bankruptcy” still has negative associations for many people and perhaps it always will. It’s unlikely to be a pleasant experience and it isn’t intended to be. It is, however, a manageable one, which does not need to make you a social outcast.
What Will The Neighbours Say?
It may seem rather archaic that in the 21st-century names of bankrupts are still published in the London Gazette, but it is essentially a means of putting potential creditors on the alert that a debtor has become insolvent and so arguably still serves a useful purpose. It is no longer considered necessary to list the names of those bankrupts in local papers (which was previously done for the same reason), which means that the only way the neighbours will find out is if they happen to read the London Gazette or if they search for you by name on the Insolvency Service website. Neither of these can be ruled out, but neither of these channels is exactly mainstream reading either. This fear comes from our own sense of failure and embarrassment.
Bankruptcy does not necessarily wipe your debt slate entirely clean
There are certain debts which are not normally included as part of a bankruptcy agreement. In short, if you owe the government money in any way, such as a fine, unpaid tax or a loan, then you should probably assume that you will still owe the government money after you have been made bankrupt. There are also other debts which may be excluded from bankruptcy proceedings including child support.
You may be able to stay in your current home
If you are a renter then there is a decent chance that you will be able to stay where you are even if your tenancy agreement says that you can be required to leave if you become insolvent. The fact is that landlords tend to value good tenants, so if you have hitherto paid your rent on time and treated the property responsibly, then there’s a very good chance your landlord will be quite happy to save themself the hassle of finding a new tenant. If you are behind with your rent your landlord can still apply to evict you even if the rent arrears are included in the bankruptcy.
If you are a home owner, then the situation can be rather more complicated, however, the key point to remember is that your creditors are not interested in your home as such, they are interested in the financial value it represents. In short, they are interested in the equity. If you are in negative equity, then you may well be able to stay in your own home even after being declared bankrupt. If you are in positive equity, then your creditors are very likely to make a claim against it (even if the debt in question was not actually secured), however, depending on your situation, it may be possible for you to settle their claim while keeping your home. This would typically involve the intervention of a third party such as a family member or friend, who would buy your creditors out of their share of the equity in your home. You would then need to make your own arrangements as to what happened after that, for example, if you would pay them back after your discharge. This would obviously not be an arrangement to be taken lightly, but bankruptcy, in general, is not to be taken lightly. There’s a 3 year time limit for selling the family home from the date of the bankruptcy order.
Your Bank Account
Your bank account will be frozen. Any money in your account will be an asset and claimed by the trustee. The trustee can ask to release some money:
- for your daily living needs
- to the other person in a joint account
The bank is allowed to use money from one of your accounts to pay your debts on another account you hold with them. You can open a new bank account after the date of the bankruptcy order but you must tell the bank or building society that you’re bankrupt.
You can return to credit-worthiness (slowly)
Bankruptcy itself typically lasts a year and, in principle, stays on your credit file for up to 6 years although in practice you may be asked to disclose even discharged bankruptcies for certain purposes, such as getting a mortgage. Your bankruptcy will stay on your credit file for 6 years after the bankruptcy order is made. You should check if the entry has been removed after 6 years. It is, however, unlikely to be held against you until the day you draw your last breath, particularly not if you learn from your mistakes and manage your finances responsibly.