A guide to the bankruptcy process

By Marianne Curphey

The number of people who have gone bankrupt has fallen dramatically (by 27%) since this time in 2011, according to figures from the Insolvency Service.

"The headline 27% fall is very much to be welcomed as it continues the trend that we have seen develop over the past couple of years," says Alec Pillmoor, head of Personal Insolvency at Baker Tilly. "The figures indicate that individuals are taking positive action to control of their finances."

That's the good news.

The more troubling news? Individual voluntary agreements (IVAs) were up 8%, and debt relief orders (DROs) were up by 16%. That means more people are struggling with debt, even if they haven't taken the plunge into bankruptcy.going-bankrupt

"Talking to people who call National Debtline leads us to believe that many people simply can't afford the £700 it costs to go bankrupt even though that would otherwise be their best option," says Joanna Elson, chief executive of the Money Advice Trust. "Insolvency figures only represent the tip of the iceberg when it comes to the scale of debt problems faced by households across the UK."

Money Advice Trust data suggests around 10 million people in the UK, or around a fifth of the adult population, are struggling with debt. If you are one of them (and see bankruptcy as a way out), here's what you need to know about the process -- and the consequences.

Why go bankrupt?
For people with large debts, bankruptcy can seem like a tempting option because it represents the opportunity to make a clean start. However, it is not a move to be taken lightly, says Una Farrell of the Consumer Credit Counselling Service (CCCS).

"You can declare yourself bankrupt but your debts would have to outweigh your assets in order for it to be an option," she says.

How can one be declared bankrupt?
You can declare yourself bankrupt by applying to the court. Any entity you owe at least £750 can also apply to the court to make you bankrupt so it can recover the debt. However, Farrell says this is unlikely to be successful if you are already paying other debts off, as your other creditors will want you to continue with payments.

If you file for bankruptcy yourself, you will have to apply at the bankruptcy court and pay the fees. Generally, these are £175 to the court and £525 to the Official Receiver (the court's bankruptcy officer).

Next, you will be interviewed about your financial affairs and required to give details about your debts and assets. The Official Receiver will decide if a trustee is needed to manage your bankruptcy.

Finally, your creditors will receive a report from the Official Receiver that you've been declared bankrupt.

What will I have to give up once I go bankrupt?
Bankruptcy is a very serious step because your assets (your home, possessions, pension and income) become fair game as a means to pay off your debts. Your business might get shut down and its assets sold off, according to the Citizens Advice Bureau.

Once you are pronounced bankrupt, you will have to declare your assets to a court-appointed bankruptcy trustee. That trustee will determine how much of your income you have to hand over and what you have to sell to pay back your creditors. There are some assets, however, that you may be able to keep, such as household items (like clothes, beds and furniture) and tools of the trade you need to continue working.

You may be able to delay the sale of your home if you have dependents who need to live in it. Yet property you inherit subsequently will be added to the list of assets with which you must repay your creditors. If  your home is sold, the mortgage is repaid first.

As for your pension, you can keep your state pension -- but funds in your company or private pension might be regarded as an asset and used towards settling your debts.

What happens to my bank accounts and credit cards?
When the court makes you bankrupt, you will have to stop using your bank cards and credit cards. These must be handed over to the Official Receiver.

Once the bank finds out you are bankrupt, it will freeze your accounts -- including joint accounts -- and not allow you to open new ones. You will have to ask your bankruptcy trustee to release funds for day-to-day expenses and bills.

What happens next?
If you adhere to the restrictions placed upon you by the court and trustees, you will be discharged from bankruptcy after 12 months and freed from your debts.

However, details about your bankruptcy will stay on your credit file for six years from the date the court made you bankrupt -- which will make it more difficult to get credit cards, loans, services like gas and water and mobile phone contracts. Worse yet, you won't get back any of assets that were used to pay your creditors, and the trustee may continue to use your income for up to three years to pay off your remaining debts.

Despite the fact that bankruptcy has damaged your credit standing, you will need to move on -- by building up your credit rating. Get a credit card designed for those with bad credit, and use it carefully, making it a point not to miss any future payments.

How can I avoid bankruptcy in the first place?
Bankruptcy is a drastic step, and there may be other options, including IVAs and debt relief orders, which can protect your assets. The problem is, those who are struggling with debt are sometimes so stressed that they just keep digging themselves deeper.

"Often people are confused and may not be claiming all the benefits they are entitled to, or they may be paying debts that they do not need to pay," says Linda Isted, communications manager at the Debt Advice Foundation.

Fortunately, a debt counsellor might be able to help you navigate your way out of debt before bankruptcy becomes necessary.

"Instead of rushing into bankruptcy, we would advise people to go for help," Farrell says. "We can draw up a debt management plan which would find the best option for you, taking into account your age, your income and the situation with any dependents that you may have."

See related: Debt relief: 3 alternatives to bankruptcy, Many UK families dangerouly close to financial ruin

Published: 19 June 2012