Consequences of Bankruptcy

Be prepared to lose everything...

We receive a lot of calls and emails from the public asking; "What are the consequences of bankruptcy?"

Though bankruptcy might seem the quickest way to wipe the slate clean, particularly for those drowning in credit card and loan debt, the advice team at Money Advice Direct warn consumers that they must be prepared to lose everything, including their home. And the problems of bankruptcy can stretch long into the future. Being made bankrupt is a very serious matter. A person must hand over their estate, including their home, to their trustee. In addition there are a number of other consequences to being made bankrupt. This section explains some of the main consequences of bankruptcy and problems associated with bankruptcy.

The consequences of bankruptcy can be split in to the following areas:

• Legal consequences – If a trustee considers that a debtor's conduct has been dishonest or blameworthy in some way, either before or during the bankruptcy, they will report it to the Accountant in Bankruptcy. The Accountant in Bankruptcy may seek restrictions on the debtor's behaviour which can last between 2 and 15 years. Details of the restrictions are recorded on the Register of Insolvencies. The following are examples of behaviour by debtors that could be considered dishonest or blameworthy:
  • incurring debts that they knew they had no reasonable chance of repaying;
  • giving away assets or selling them at less than their value;
  • gambling or making rash speculations or being unreasonably extravagant; and
  • not co-operating with the trustee during the period of the bankruptcy.
• Credit consequences -An individual’s credit rating will be affected for 6 years. Neither the official receiver nor the trustee have any influence over a debtor's credit rating.
• Social consequences – Many people who are heavily in debt refuse to go bankrupt even when it is their best option because they don't want the perceived stigma.
• Banking consequences - A bank may freeze or close an account of someone who is bankrupt. Some banks will allow a debtor to have an account; however the debtor must tell their bank that they have been made bankrupt. If a debtor has any savings they will be transferred to their trustee. If a debtor experiences any difficulties with their bank account they should speak to their bank or a money adviser.
• Financial consequences - One of the biggest consequences of bankruptcy is the loss of control it brings. If you declare yourself bankrupt you will lose control of all of your assets. You will also be unable to get any credit over £250.
• Business consequences  - Bankruptcy can result in you being forced to stop trading, and losing your professional status. It can adversely affect your employment or future prospects. It will place stringent controls on your financial affairs and wreck your credit rating for years to come.
• Health Consequences – Debt and ill health are linked. Anxiety and depression are common amongst people facing serious debt problems.
• Utility consequences - Service providers such as gas or electricity suppliers may have concerns with the way they provide services to a debtor and may wish to change the way they receive payments. The changes could include the installation of a meter or the set up of a pre-payment plan.
• Family Consequences - family members are not affected in any way if a member declares bankruptcy. In most places according to bankruptcy law a married person can file for bankruptcy alone unless the assets are owned jointly or in case of common bank accounts and also if one is self employed and one's spouse is a partner in the business.

Alternatives to bankruptcy

An IVA or Individual Voluntary Arrangement is considered to be an alternative to bankruptcy because the consequences are not as detrimental. An IVA is a legally binding arrangement supervised by a Licensed Insolvency Practitioner, the purpose of which is to enable an individual, sole trader or Partner ("the Debtor") to reach a compromise with his creditors and avoid the consequences of bankruptcy. They do, however, come with their own issues.

Consequences of an IVA

• Where contributions from income are being made, IVA's are generally expected to be for a period longer than that in bankruptcy, i.e 5 years as opposed to 3 years. The 5-year period is often required by creditors as a bargain for allowing the Debtor to avoid the consequences of bankruptcy.
• If the Debtor fails to comply with the terms of the arrangement his home and assets can still be at risk if they have not been specifically excluded from the proposals.
• If the IVA fails as a consequence of the Debtor not meeting his obligations under it, it likely that the Debtor will be made bankrupt at this time.
• There will be no opportunity for a Trustee in Bankruptcy to investigate the actions of the Debtor or possibility of hidden assets.

Bankruptcy may be the best option if your debts are escalating and your repayments are unmanagable, you do not own a property or have any other significant assets, and you have no reason to fear the effect of bankruptcy on your livelihood. 

It is important that before considering  bankruptcy you fully understand the consequences.  Read our Debt Articles for more information on the consequences of bankruptcy and your alternative options. If you have any questions about the consequences of bankruptcy then please feel call 0800 074 6918.

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