What happens when you become bankrupt?
If you have debt problems, you may be thinking about the possibility of bankruptcy. It's important to understand what bankruptcy is, and what alternatives exist. Bankruptcy isn't permanent, so you may choose it as a way of clearing your debts and making a fresh start.
What is bankruptcy?
Bankruptcy is a legal status that usually lasts for a year (see 'How long does bankruptcy last' below) and can be a way of clearing debts you can't pay. When you're bankrupt, your non-essential assets (property and possessions) and excess income are used to pay off your creditors (those you owe money to). At the end of the bankruptcy period, most debts are 'discharged' (cancelled).
How do you become bankrupt?
The High Court can declare you bankrupt by issuing a 'bankruptcy order' after it's been presented with a 'bankruptcy petition'. A petition may be presented by:
- one or more creditors
- the debtor
- the supervisor of, or a person bound by, an individual voluntary agreement
Filing your own bankruptcy petition
If you decide that bankruptcy is the best option available to you there are a number of forms that you need to complete. You can get these forms, free of charge, from the Bankruptcy and Chancery Division of the High Court in Belfast or from the Insolvency Service
- the petition (Insolvency Rules (NI) 1991 form 6.30) - this form is your request to the Court for you to be made bankrupt and includes the reasons for your request
- the statement of affairs (Insolvency Rules (NI) 1991 form 6.31) - this form asks you to list all your assets (anything that belongs to you that may be used to pay your debts) and all your debts, including the names and addresses of the creditors and the amount you owe each one. When you have completed this form you will be asked to make a sworn statement as to its accuracy and completeness before an officer of the court or a solicitor. It is therefore vital that you make a full disclosure of your assets and debts
- Insolvency Service Public Portal (DETI website)
There are three fees that you will have to pay when you take your petition and statement of affairs to the Court:
- the deposit of £525 towards the costs of administering your bankruptcy and is paid to the Department of Enterprise, Trade and Investment. The deposit is payable in all cases and payment may be made in cash or postal orders, or by a cheque from a building society, bank or solicitor. Cheques should be made payable to the Official Receiver”. Personal cheques will not be accepted
- the court fee of £115. This fee may be paid in cash or by cheque or postal order made payable to 'Northern Ireland Courts and Tribunals Service'. In some circumstances the court may waive this fee; for example, if you are on Income Support. If you are not sure whether you qualify for a reduction in the fee or whether you are exempt from paying the fee, court staff will be able to advise you
- the fee payable to a solicitor before whom you swear the contents of your statement of affairs. You should expect to pay around £7 for this service
You should then take these completed forms, along with the receipt of your deposit paid to the Insolvency Service, to the High Court.
A creditor making you bankrupt
Your creditors can present a creditor's petition if you owe them an unsecured debt of over £750. This may be the sum of two or more debts which total over £750 and there may be different petitioning creditors on the same petitition in respect of different debts.
Once bankruptcy proceedings have started, you must co-operate fully even if it's a creditor's petition and you dispute their claim. If possible you should try to reach a settlement before the petition's due to be heard - doing it later can be difficult and expensive.
Alternatives to bankruptcy
Bankruptcy is a serious matter - you'll have to give up possessions of value and the interest in your home. However, you don't have to become bankrupt just because you're in debt. You can try to make arrangements with your creditors instead - including:
- informal agreements - you write to your creditors and try to agree a repayment timetable
- individual voluntary arrangements (IVAs) - an insolvency practitioner helps you negotiate repayment terms
- administration orders - the Enforcement of Judgments Office(EJO) orders you to make payments, which the EJO then distributes amongst your creditors
- debt relief orders if you cannot pay and owe not more than £15,000
A Debt Relief Order is a formal insolvency process that is aimed at people who cannot pay their debts and who have no assets, a low income, no other access to debt relief and no prospect of the situation improving. If people do have assets, or there is a possibility of an improvement in financial circumstances, a DRO is not an appropriate solution.
Where is a bankruptcy order made?
Bankruptcy petitions can only be presented in the High Court in Belfast.
Who deals with your bankruptcy?
An Official Receiver is appointed to protect your assets. They act as trustee of your bankruptcy affairs if you have no assets.
If you do have assets, an Insolvency Practitioner will be appointed to act as trustee and sell your assets to pay your creditors.
Once a bankruptcy order has been made against you, your creditors can no longer pursue you for payment. Payment becomes the responsibility of the trustee.
How bankruptcy affects you
Once you're bankrupt, the Official Receiver, or appointed trustee, can sell your assets to pay your creditors. However, certain goods aren't treated as assets for this purpose, for example:
- equipment you need for your work (for example, tools or vehicles)
- household items needed by you and your family (for example, clothing, bedding and furniture)
If you own your home, you may have to sell the property. This will depend on who owns the property, the value of the home, and whether the property is worth more than your mortgage. This is called ‘equity’.
It may be possible for the joint owner or family and friends to make an offer to the official receiver to buy out your share of the equity. This is particularly helpful if there is little or no equity.
The Official Receiver can look at your income (taking into account expenses such as your mortgage, rent and household bills) and decide if payments should be made to your creditors.
You may be asked to sign an 'income payments agreement' to pay fixed monthly instalments from your income for three years.
If you don't pay (or if you don't sign the agreement voluntarily), the Official Receiver can apply for an income payments order from the court to order you to pay. This will run for at least three years from the date of the order.
If your circumstances change, you'll need to tell the Official Receiver, so they can review these arrangements.
You'll still have to meet ongoing commitments such as rent or debts incurred after you become bankrupt.
The Official Receiver or a trustee in bankruptcy can make other applications to the Court following a Bankruptcy Order. They include:
- public examinations
- applications to suspend automatic discharge
- applications for permission to act a a director
- private examinations
Your obligations when you're bankrupt
- give the Official Receiver details of your finances, assets and creditors
- look after your assets and hand them over to the Official Receiver with the relevant paperwork, such as bank statements and insurance policies
- tell your trustee (either the Official Receiver or insolvency practitioner) about any new assets or income during your bankruptcy
- stop using credit cards and bank or building society accounts
- not obtain credit over £500 without telling the creditor that you're bankrupt
- not make payments direct to your creditors (there are exceptions to this, such as mortgage arrears and outstanding child support payments)
You may be able to open a basic bank account once you are bankrupt.
Even after the bankruptcy period, you may find it difficult to obtain credit. The Official Receiver does not send any form of notice to credit reference agencies. The agencies pick up information from other sources such as the Insolvency Register, advertisements of bankruptcies in newspapers, "The Belfast Gazette" and the "Belfast Telegraph", and the Enforcement of Judgements Office.
Details of your bankruptcy are also kept on the Insolvency Register which is maintained by the Bankruptcy and Chancery Office at the High Court and contains records of all insolvencies in Northern Ireland for the last ten years.
How long does bankruptcy last?
Bankruptcy normally lasts for one year. After this time, you'll be 'discharged' from your bankruptcy regardless of how much you still owe.
Your discharge could happen earlier if you co-operate fully with the Official Receiver. However, in a small number of cases and if you've behaved irresponsibly (for example, by not cooperating), bankruptcy can last for much more than one year.
Where to get help and advice
If you're thinking about declaring yourself bankrupt or you're being threatened with bankruptcy, it's important to seek independent advice.
Several agencies offer free help including:
- Citizens Advice Northern Ireland (contacts section)
- Step Change Debt Charity (contacts section)
- Debt Action NI (contacts section)
- Advice NI (contacts section)