Personal insolvency FAQs

For most people personal insolvency is an unknown area of law. Below we attempt to answer some of the most frequently asked questions.

1. Will I go to prison if I'm made bankrupt?
2. Will my bankruptcy be reported in the newspapers?
3. I am going bankrupt. Will I have to repay all my creditors before my bankruptcy is discharged?
4. Does my spouse or partner become responsible for my debts?
5. Will all my possessions be taken away?
6. Will I lose my home?
7. Can I have a bank account whilst bankrupt?
8. Will I be able to keep my mortgage?
9. Will they take my spouse's / partner's / children's possessions?
10. Will I be able to obtain a mortgage or credit once my bankruptcy is finished?
11. What happens to my pension / endowment / savings?
12. Can I keep my car?
13. Can I run my own business when I am bankrupt?
14. What happens if I win the Lottery or otherwise come into money before I am discharged?

Individual voluntary arrangements (IVAs) FAQs

1. I want to enter into an IVA, is it appropriate for me?
2. What is the least amount that I will have to pay creditors under an IVA?
3. Will my IVA be reported in the newspaper?
4. I want to continue in business – but will my creditors want to do business with me? How can I overcome their reluctance?
5. What will happen if I am unable to carry out my proposals?
6. I do not want to include all my creditors, can I deal with some separately?
7. Will I be able to get credit when I am in an IVA?
8. Will I be able to get credit once my IVA is finished?

Personal Insolvency

1. Will I go to prison if I'm made bankrupt?

Debtors' prisons were abolished in this country in 1869 and nobody can send an honest bankrupt to jail. You could conceivably go to prison for fraud or other dishonesty in connection with the bankruptcy proceedings. If you think this may apply to you, seek professional advice as a matter of urgency.

2. Will my bankruptcy be reported in the newspapers?

Yes. If you want to see what form the reporting will take, check out the Public Notices column of your local newspaper – usually alongside the planning and licensing applications. Bankruptcy notices don't often hit the headlines unless you are a celebrity (though many professionals have to read them as part of their job).

3. I am going bankrupt. Will I have to repay all my creditors before my bankruptcy is discharged?

Bankruptcy will free you from unsecured debts. Secured creditors (those who have a legal charge i.e. a mortgage) will retain their security even though you are bankrupt. However, your assets – with some exceptions – will be sold and the money used to meet the cost of the bankruptcy and the claims of your creditors.

4. Does my spouse or partner become responsible for my debts?

Not for your personal debts but if the debt is in your joint names or they guaranteed your debt then they will be "jointly and severally liable" for the debt – that is, creditors can pursue them for the whole of the debt.

5. Will all my possessions be taken away? What can I keep?

There is a misconception that when a person is made bankrupt the bailiffs come and clear their homes. The law allows bankrupts to retain their domestic effects, including furniture, white goods (such as fridges and washing machines) and clothing. This does not, however, extend to items of particular value such as antique furniture and works of art, valuable jewellery, expensive electrical goods (some IT equipment would be fair game) and high value sporting goods. Jointly owned items can also be taken – they are sold and the proceeds divided between your creditors and other joint owner.

6. Will I lose my home?

If you have an interest in a home or any other property, then any value (equity) in that property will have to be realised for the benefit of your creditors. Suppose you and your partner own a house worth £150,000, but have a mortgage of £80,000. The equity – net worth – of the property is therefore £70,000. Your share of the equity is £35,000 and your creditors will expect to see that £35,000 realised.

7. Can I have a bank account whilst bankrupt?

You can have a bank account but many banks will not accept your application for an account if you are an undischarged bankrupt. There are, however, some banks and building societies that will accept bankrupts.

8. Will I be able to keep my mortgage?

Yes, providing that:

Your mortgage lender is confident that you will be able to maintain your regular mortgage payments and deal with any arrears; and
Your trustee in bankruptcy does not consider that your monthly payments are excessive for your needs when compared, for instance, with the cost of renting a suitable home.

9. Will they take my spouse's / partner's / children's possessions?

No. But if you have transferred your assets to members of your family to avoid losing them to your creditors by, for example, giving away your Rolex watch to your 18 year old son just before going bust, this would be attached as a "transaction at an under value" and an application would be made to Court to have it set aside.

10. Will I be able to obtain a mortgage or credit once my bankruptcy is finished?

It is becoming easier to obtain mortgages and other credit after bankruptcy. There are a number of specialist lenders operating in this field. You must however expect to pay a higher rate of interest for at least the first two years of the loan.

11. What happens to my pension / endowment / savings?

A bankrupt's pension fund is off limits – it is not available to a trustee in bankruptcy. Other savings, such as endowments and saving bonds, will go into the kitty to be realised in the bankruptcy.

12. Can I keep my car?

Yes, providing that it is of low value and you can persuade the authorities that you need it to get to work. However, any claim that you need a Range Rover for the school run or a Porsche to get to the golf club will not be acceptable!

13. Can I run my own business when I am bankrupt?

Yes you can, so long as you:

Do so in your own name, or the name in which you were made bankrupt; or
Make it clear to all those with whom you do business that you are bankrupt.

As a sole trader you will find the financial restrictions of bankruptcy a serious impediment to running a business and, while there is no legal bar as such, the practical problems (such as buying materials when you are only allowed £500 credit) may make it impossible to trade.

As a bankrupt you are disqualified from acting as a director of a limited company without special leave of the Court. You are similarly barred from acting in any managerial capacity of a limited company. And certain professions, such as medicine and the law, do not allow bankrupts to practise.

14. What happens if I win the Lottery or otherwise come into money before I am discharged?

You must inform the trustee in bankruptcy about any windfalls or inheritances that you receive during your bankruptcy and the money must be paid to your trustee in bankruptcy. If your creditors are paid in full with statutory interest any surpluses will be returned to you and your bankruptcy can be annulled.

It is, however, sensible to ask anyone who is likely to mention you in their will to make other arrangements – such as leaving the money to your children instead. Anything willed to you during your bankruptcy would go towards paying off your debts; a scenario that is unlikely to reflect the wishes of the will writer.

Individual Voluntary Arrangements (IVAs)

1. I want to enter into an IVA, is it appropriate for me?

It depends on your circumstances. Only if it is better for you and better for your creditors. We have a booklet to help you decide. Contact us and we will give you specific advice or send you a copy of the booklet.

2. What is the least amount that I will have to pay creditors under an IVA?

Every case is different and there is no specific formula. Your creditors will expect your offer to be the best you can make. If your debts are mainly to credit card companies, then they generally look to receive a minimum of 35p in the pound.

3. Will my IVA be reported in the newspaper?

No, unlike bankruptcy there is no requirement for it to be advertised. There is, however, a central register of Individual Voluntary Arrangements and this is a matter of public record.

4. I want to continue in business – but will my creditors want to do business with me? How can I overcome their reluctance?

This is always difficult, but provided your suppliers are satisfied that you have done enough to ensure that the continued business is viable they should be supportive. You may initially have to trade on a pro forma basis, where you pay up front for goods and services.

5. What will happen if I am unable to carry out my proposals?

This will depend upon the terms of your arrangement, but usually creditors will insist on a failure clause that would result in your bankruptcy if you failed to keep your side of the bargain.

6. I do not want to include all my creditors, can I deal with some separately?

You must provide a full disclosure to your main creditors detailing any that you propose to exclude from the arrangement. Only if 75% of your creditors agree are you allowed to deal with some creditors differently than others.

7. Will I be able to get credit when I am in an IVA?

It will be difficult and even if credit is available it will probably be at high rates of interest. Lenders will be aware of your status from various credit references agencies. In any event, it is unlikely that your existing creditors would agree to you taking on any significant new credit during the course of an IVA. Your IVA Supervisor will monitor any new credit agreements.

8. Will I be able to get credit once my IVA is finished?

Yes, most lenders are prepared to grant credit to individuals who have fulfilled their obligations in an IVA. You may, however, have to wait for some time after the conclusion of your IVA before credit facilities are restored. Remember that an IVA is likely to remain on your credit history for six years. Remember an IVA does just as much damage to your credit rating as a bankruptcy and in both cases its rehabilitation only starts after the IVA or bankruptcy has completed.