What is bankruptcy?​

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Bankruptcy is a potential solution to severe debt problems. However, bankruptcy will have a significant impact on your financial future therefore it is not to be taken lightly and essential that you obtain professional debt advice if you are facing the prospect of bankruptcy. In the context of your home having been repossessed by a mortgage lender and subsequently sold, but the proceeds of sale not fully covering the level of your mortgage arrears (‘shortfall debt’), you may be forced to apply for bankruptcy if you do not have the means to pay. 
 

What happens during bankruptcy?
 

Your assets will be sold and the proceeds shared out between those you owe money to pay off your debts. If you are a homeowner, your home will be sold, even if you own it with someone else.

This period of bankruptcy typically lasts for one year. After this time, any remaining debts you have will be written off and you will likely be discharged from bankruptcy. 
 

What are the different types of bankruptcy? 
 

1. Voluntary bankruptcy

If you are unable to pay your debts, either you or someone you owe money to can apply to the court for you to be made bankrupt. You will be required to have unsecured debt(s) of £750 or more. A deposit of £345, and a court fee of £150 will be payable. Whilst it is possible to apply to the court to have the court fee waived, the deposit is compulsory. Please note you should always take advice from a specialist adviser before beginning the process.
 

2. Involuntary bankruptcy

Your creditors (those that you owe money to) are also able to start bankruptcy proceedings against you if you owe them more than £750 in unsecured debts. Your creditors may combine their debts to reach this threshold and apply to the court together. This is typically what your lender will do if you are still in shortfall debt or mortgage arrears despite your home having been sold.
 

Your lender must first send you a statutory demand, a written demand for payment that gives you an opportunity to arrange an acceptable repayment schedule setting out how you intend to repay your debt. A statutory demand is basically a document from one or more of your creditors asking for their debts to be repaid, and has to be served before bankruptcy proceedings can begin.

 

Many creditors will issue a statutory demand as a way of trying to get you to deal with your debts. You may not be served with a statutory demand if your financial situation was discussed in full at your repossession court hearing where the order for repossession of your home was made in court. In this scenario your lender will be aware of your inability to pay and you may already have been encouraged to apply for bankruptcy.
 

Once your receive a statutory demand for payment, you will have to act within 21 days to ensure that your creditor does not issue bankruptcy proceedings. Your creditors can apply to start bankruptcy proceedings against you only if:
 

• They give you 21 days notice that they intend to take bankruptcy proceedings against you

• A county court judgement has already been made against you and court bailiffs have been sent to seize your goods, but the bailiffs were unsuccessful in doing so

 

You can prevent bankruptcy proceedings if you repay the debt in full or reduce the debt to below £750. You may also be able to prevent your creditor taking bankruptcy proceedings if you:
 

• Offer to repay the debt in instalments

• Try to settle the debt by negotiating to pay less than you owe

• Set up an individual voluntary arrangement (IVA)

• Apply for an administration order

 

If you dispute the claims made under the statutory demand, you can apply to the court to have it set aside. If successful, this will prevent your creditor applying for you to be made bankrupt.
 

If a court orders that you are made bankrupt, your creditors have to file to reclaim money they are owed through your trustee. A trustee is an official appointed by the court, often the official receiver or an insolvency practitioner. The trustee will attend to the claims made by your creditors. Any money that can be raised from you will be shared out fairly between your creditors to repay your debts.
 

What are the effects of bankruptcy?
 

If you are made bankrupt, your possessions and assets will likely have to be sold and much of your income diverted to pay your creditors, leaving only a reasonable amount of money to help with your living expenses. There will be numerous restrictions imposed on how you conduct your financial affairs, including your ability to borrow money or run a business. For example, being bankrupt makes it very difficult for you to secure any credit, loans or a mortgage in future.
 

How do mortgage arrears and other debt problems affect credit ratings?
 

If you have a history of mortgage arrears and other debt problems you will often have difficulties finding a lender or landlord who will grant you a mortgage or tenancy. Credit reference agencies such as Experian and Equifax usually check your credit history for your lender or landlord before they lend you money to buy a new home or grant you a tenancy agreement.
 

Mortgage lenders typically also check the Council for Mortgage Lenders’ Possessions Register, which holds information about repossessions by any of its members during the last six years. You can write to the credit reference agency asking for a copy of the information they hold on you. You normally have to pay a nominal fee of a few pounds, but you might not have to pay if a specialist adviser does this for you or the agency offers a free report. The agency should send you a copy of the information they hold on you within seven working days, and explain how you can change it if it is not correct. If the agency refuses to change information that is incorrect, seek advice. You may also be able to complain to the Information Commissioner’s Office.
 

In summary, if your home has been repossessed in the past you will likely have significant difficulty in obtaining another mortgage in the future, therefore it is highly recommended you take action to avoid finding yourself in that situation by stopping your repossession order. Equally if you have found this content useful and feel there are any ways in which we can help you further, please refer to our FAQs and do not hesitate to get in touch. 

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