What does going bankrupt mean?

Equifax provides the answers

Can a local council make an individual bankrupt for not paying their council tax? Will anyone know if you have gone bankrupt? Does it show on your credit file? Will it affect your ability to get a job?

According to the latest report, last year saw another steep rise in the number of people that had county court judgments registered against them, with nearly 850,000 consumers having CCJs registered. As more and more consumers are incurring these judgments, many will see bankruptcy as an easy way out.

At the end of 2006, for the first time in the UK, more than 100,000 people had declared themselves bankrupt. Government figures also show that 15,356 people bankrupted themselves and 11,299 agreed an IVA in Q1 2007. Equifax, the instant online credit information provider, is concerned that many consumers do not understand the implications of going bankrupt, thinking that it’s simply an easy way out of debt with no real consequences.

“The 2002 Enterprise Act meant a bankrupt’s debts can be written-off after one year instead of three” confirmed Neil Munroe, External Affairs Director, Equifax. “This has led to a number of people struggling with debts seeing this as an attractive option to wipe the slate clean. However, whilst the bankruptcy will be cleared after a year, we are concerned that some people may not realise that the record of bankruptcy will remain on their credit file for six years. And this could have quite a serious impact on their future.”

Lenders use an individual’s credit file when assessing applications for credit or loans. Bankruptcy could result in them either being declined or paying a premium. It can also affect their ability to get a job. It can even affect a person’s ability to get a mobile phone – because a credit agreement will be taken out for the line rental.

Equifax is presenting consumers with the facts, so that they go into bankruptcy with their eyes open.

BANKRUPTCY – THE FACTS

You won’t have to pay your creditors if you go bankrupt.

Wrong – If you have any assets (such as equity in a house), they may be sold with the proceeds going to the creditors. Your monthly income will be assessed and if the insolvency examiner finds you have more than you need to meet basic living requirements, a proportion of the surplus will be paid to creditors for a period of three years.

Your council can’t make you bankrupt if you don’t pay your council tax.

Wrong – You can be made bankrupt if you owe a minimum of £750 unsecured debt – and that could include arrears on your council tax.

It costs nothing to go bankrupt.

Wrong – It costs £460, a fee paid at court covering court costs and the Official Receiver’s fee. They do not accept cheques or credit cards – cash only.

Other people won’t know that you’re bankrupt.

Wrong – Bankruptcy orders are a matter of public record. They are advertised in the London Gazette and a local newspaper. The information is also displayed on the Individual Insolvency Register (accessible on the Insolvency Service website) for a period of three months after you are discharged.

You can keep your car if it’s worth less than £3,000

Wrong – The value of your car is irrelevant when it comes to deciding whether it will be sold to pay your creditors. If your car is essential for work and worth more than around £3,000 but you can’t find another person to pay for the excess value, the car will be sold and you will have to buy a cheaper model with the surplus cash going to your creditors.

If you’re bankrupt and come into some money i.e. win the lottery or get some inheritance you get to keep it all.

Wrong – You have a legal duty to inform your trustee of any assets acquired after the date of your bankruptcy. The trustee will then claim all the money you have gained. The money will be released only after all costs and debts are paid, including any interest you owe. You could then apply for a bankruptcy annulment on the grounds of payment of debt in full.

The restriction on you while in bankruptcy lasts 12 months

Wrong –If you do not cooperate with the Official Receiver or your trustee the court can make an order to suspend your discharge from bankruptcy until you cooperate. So you can be bankrupt indefinitely. There is also the possibility of the court making a bankruptcy restriction order against you if you are found guilty of misconduct (for example, getting a loan with no intention of paying it back just before your bankruptcy). Under such an order most of the restrictions placed on you during bankruptcy remain on you for an additional 2 to 15 years.

Bankruptcy is an easy option.

Wrong – Recent changes to bankruptcy law have reduced the period that most people have to remain bankrupt before they are discharged, but you will lose almost all your assets and are likely to pay a lot more when you borrow money once you are discharged because you represent a greater risk to the lender.

You can have a fresh start in a new job.

Wrong – It is now common for many large companies, especially those in the financial services industry and those working in areas that require high levels of security, to use credit information as part of an individual’s reference. Bankruptcy on an individual’s credit file could have a negative impact on the employer’s decision.

Once discharged you will be able to gain credit again.

Wrong - The fact you were bankrupt is held on your credit file for six years. Lenders use credit information to make lending decisions, which could make it difficult for you to obtain credit including a mortgage, mobile phone, loans, and credit cards.

*Figures from the Department of Trade and Industry

For further information or to obtain an instant copy of your credit report visit equifax.co.uk.