Hey budgeting buddies,
Here is a post, which I will be quite honest with you, didn’t even occur to me to write. I was speaking with a coaching client of mine, and they told me, they were thinking about declaring bankruptcy.
I will honestly admit it took me a minute to calm myself down because I was angry. Not at my client, as they had already decided it was a bad idea. But I was angry at the person who told them to declare bankruptcy to begin with.
Now you must be thinking “that is a bit of an overreaction. Why are you angry at someone for a legal procedure that may help your client” and you would be right, if we were talking about 10,000s of debt, with no income at all.
They weren’t. They were talking about £2,000. Of which my client could pay in full at the time of being billed.
So, what is declaring bankruptcy? And why am I so against it declaring bankruptcy?
Long story short, bankruptcy is:
- The court agrees with you that you cannot afford your debt,
- They will write it off ALL debt which is applicable for you. [Not all debt is applicable]
- They will restrict your access to all financial products.
- They will do everything to recover as MUCH money as possible to pay your debts.
- I whole heartedly believe that in MOST cases, declaring bankruptcy is not worth it. You still can, but in my opinion, the consequences aren’t worth the benefits.
Long story in full:
What is bankruptcy?
Bankruptcy is the legal proceeding declaring you cannot afford the personal debts, which can be bankrupt able, that you have accrued.
However, the process to be declared bankrupt is a long, and expensive (£680 at the time of writing) process which will go into all aspects of your life.
There will be no privacy in the process of being declared bankrupt. Then it will also be public information until the bankruptcy is considered discharged. Usually, it gets discharged after a year but can take longer.
Furthermore, while you are still considered bankrupt and (occasionally) a few years after there will be restrictions in place to do with your finances.
In the beginning these restrictions are put on you from the court; however, after your bankruptcy it will be the actual creditors who will restrict your access on your credit, as the bankruptcy is on your credit report.
As mentioned earlier, not all debts can be bankrupt able. So that begs the question:
What debt cannot be bankrupt able?
I have noticed is that in the UK, it is assumed any debt that you have, can be bankrupt able. Spoiler alert, this is inaccurate.
- Like in the US, Student loans in the UK cannot be bankrupt able.
- any court mandates.
- Child support arrears,
- any personal injury/death to another person are not included.
Even if you are declared bankrupt, you will still be required to pay the above.
Luckily, debts that are bankrupt able include:
- loans from a bank,
- credit cards,
- rent arrears
Side Note: rent arrears being bankrupt able will not exemptyou from being evicted.
Regardless of whether you declare bankruptcy, do not risk your roof, or other essentials to life.
What are the positives for declaring bankruptcy?
The positive of being declared bankrupt is that you do not have to pay the debts which have been included in the order.
This will give you space and peace of mind, because after you’ve been declared bankrupt the creditors will not contact you anymore.
It will also drop your debt amount, if not getting rid of it all, so you can “begin again” in your financial life.
However, declaring bankruptcy does have its drawbacks.
What are some negatives of declaring bankruptcy?
The negatives of being declared bankrupt, are numerous.
The biggest ones include:
When declared bankrupt the trustee in charge of your case can take and sell assets of value to settle as much as the debts as possible.
If your income is high enough, you may also be required to pay back some of your bankruptcy debts. This is called an Income payment agreement (IPA), or if you refuse that, you can be taken to court and given an Income Payment Order (IPO). These are where you pay nominal amounts [based on your income] to help payback some of your debts.
Your bankruptcy is also public knowledge. Your landlord, utility providers, employers etc can be notified/ you may have to notify them and there may be repercussions to being declared bankrupt. Specifically, if you work in a role involving finances. If you own your own business, this may also be adversely affected by you being declared bankrupt.
Your bankruptcy will be on your credit report for six years after your bankruptcy is dissolved. Remember, the official government website says this usually takes a year, however, can take longer.
I will be honest; the potential negatives can outweigh the positives. However, there are alternatives.
- You can DIY a debt repayment program, where you get yourself on a tight budget, increase your income, negotiate with your creditors, and begin slowly chipping your debt away on your own.
- You can investigate doing a DIY with help from a coach or financial advisor. This will be helpful as a support system as well as guiding you through your debt payoff.
- You can research a debt management plan which will help you get your debt in order outside of your essential bills/debts. I.e., loans, credit cards etc. They will help you negotiate a singular minimum payment. They will also talk to your creditors for you.
- Like bankruptcy, there is also a Debt Relief Order (DRO). However, the consequences are remarkably similar. So not something to do lightly.
- Individual Voluntary arrangement (IVA) is like the Debt management plan, however, these are legal agreements, whereas the DMP is more informal.
I would suggest looking into your alternatives before applying for bankruptcy. Just to make sure that you are making the correct choice for your personal financial situation.
At the end of the day, you need to make your own informed decision, but here are some things to consider before you start your debt paying journey whether you go through bankruptcy, DRO, DIY Debt repayment, or IVA.
Questions to consider:
- How much debt do you have currently? Calculate both all your debt AND ALL debt which is included in a bankruptcy order.
- How long will it take to pay off all your debt? At your current rate of disposable income. You can use Undebt.it to find this out.
- How long will it take to pay off all the debt not included in your bankruptcy order? At your current rate of disposable income. You can again, use Undebt.it to find this out.
- Will your circumstances change any time soon? Promotion, inheritance, job loss etc?
In conclusion, my main goal in my coaching, social media, and blog is to keep people from debt, have solid financial literacy foundations and have strategies in place to reach their financial goals.
I don’t want people to feel pressured one way or another, but as I know from personal experience (I’ve known multiple people who’ve been through the process) that the restrictions of bankruptcy can be detrimental to your way of life. It makes things as paying a utility bill or getting a basic phone contract extremely hard.
If declaring bankruptcy is still something you are interested in, read both the UK Government website for information as well as the Citizen’s advice Bureau. They have lots of information (over 15 webpages on the CAB website), to help you decide whether this is the correct choice for you!