Is Bankruptcy The End?
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If you're in serious debt and are considering bankruptcy, are you worried about how it might affect your future forever? This article should set your mind at rest.
With the economy sliding towards recession, jobs increasingly insecure and the future looking dark for those in debt, it’s possible more people will be considering bankruptcy over the coming months.
Unfortunately, someone close to me has recently been in this difficult position. Seeing my friend’s distress has been a reminder of the emotional struggle people go through when they (or in this case their partner) chooses to go bankrupt.
When she asked me about the practical side of bankruptcy, I was able to forward my friend this excellent, informative article by my Foolish friend Neil Faulkner.
However, she was also keen to know about what happens to someone after they’ve been bankrupt. So, in this article I’d like to address some of the concerns people have about what bankruptcy will mean for them in the long-term.
I’ll look at these questions:
- How long will bankruptcy last?
- What will happen to my pension if I go bankrupt?
- Will I ever be able to get credit or a mortgage again?
- Will going bankrupt affect my career?
- Is bankruptcy the end?
How long will bankruptcy last?
Bankruptcy itself usually lasts for around a year. During that period, you’ll officially be an ‘un-discharged bankrupt’, which means your financial affairs will be restricted. Also, you’ll possibly be required to pay a monthly sum towards your debts by the Official Receiver (OR) -- the person dealing with your case.
If you comply with the rules set by the OR, you’ll usually be ‘discharged’ from bankruptcy within 12 months. Effectively, this should mean you can start living normally again -- but you may still have to make payments towards your debts after this, for up to three years in total.
However, if the OR believes you have acted in a blameworthy or dishonest way either before or during your bankruptcy, he or she can ask the court to make a Bankruptcy Restrictions Order (BRO). If granted, a BRO could restrict your financial freedom for a further two to 15 years -- so it’s vital to ensure your behaviour complies with bankruptcy rules. You can find out more about BROs (and the kind of actions that can lead to them) here.
What will happen to my pension if I go bankrupt?
Since 29 May 2000, any pension scheme that has been approved by HM Revenue and Customs does not form part of a bankrupt person’s estate, and therefore no claim can be made on it.
If you discover your pension scheme is unapproved, you may ask the court for an exclusion order which will prevent it from being counted as part of your estate.
However, if there is no way you can exclude your pension from the bankruptcy procedure, your lump sum and regular payments may be subject to claims by your bankruptcy trustee (on behalf of your creditors).
Also, it’s important to be aware that if you start receiving payments from a pension before you are discharged from bankruptcy, this can be counted as income when the court decides how much (if anything) you must pay back towards your debts each month.
Will I ever be able to get credit or a mortgage again?
After you’re discharged from bankruptcy, the court’s Bankruptcy Order will still be visible on your credit report. It will stay there for six years in total.
For this reason, you may find it difficult to obtain credit for some time -- and any credit you are offered might be at high rates of interest.
After the Bankruptcy Order has been deleted from your credit report, you will begin to find it easier to apply for some forms of credit. However, if you're asked whether you have ever been declared bankrupt during an application process, it’s vital that you answer honestly.
You’ll probably have to declare the fact that you have been bankrupt should you apply for a mortgage -- and it is possible this will affect your chances of being approved and/or make a difference to the interest rate you’re offered.
In my opinion, it’s likely that the very best financial products may remain difficult for you to obtain after bankruptcy, mainly because you’ll often be required to state you have been bankrupt in the past. However, there are things you can do to help re-build your credit rating. Read 'How To Build An Excellent Credit History' by Jane Baker
Will going bankrupt affect my career?
While you are bankrupt, you will automatically be excluded from doing certain jobs. For example, you won’t be able to work as an MP or act as a company director, and some professional bodies will stop you from working while you are bankrupt.
The good news, however, is that there’s no reason why your career prospects should be affected in any way after you’ve been discharged from bankruptcy.
Is bankruptcy the end?
From looking at the stories of people who’ve been through the process, it seems to me that bankruptcy will probably have a permanent effect on anyone who experiences it.
That doesn’t mean, though, that it’s something terrible you will never recover from. Rather, it seems that bankruptcy can change a person -- especially their relationship with money.
While going bankrupt is usually a difficult and unpleasant experience, I don’t believe you should view it as ‘the end’. In fact, bankruptcy is designed to give those who are in impossible situations the chance for a new start.
If you feel bankruptcy is something you need to consider, I’d urge you to seek support from the friendly Fools on our Dealing With Debt discussion board. I’d also recommend that you get some independent, free advice from Citizens Advice, the Consumer Credit Counselling Service or National Debtline.
Good luck, now and for the future.