How to Recover from Bankruptcies

Declaring bankruptcy is one of the best opportunities for a fresh financial start, but it can still take individuals many years to fully recover from the financial and personal effects of bankruptcy.

Bankruptcy is a formal legal procedure and, as such, it can have severe, long-term consequences. It’s not a process to be entered into without extensive consideration, because it’s a process that can be difficult to recover from.

In this article, the expert insolvency practitioners at Irwin Insolvency explain how to prepare and plan for a swift recovery from bankruptcy. Keep reading to discover the best ways of surviving bankruptcies in the UK.

What Happens When You Declare Bankruptcy?

Before you can start planning how to recover from bankruptcy, it’s important to understand how bankruptcy will affect your employment, finances, and even your family and friends. Bankruptcy is a serious legal process, and the consequences of declaring bankruptcy can last for years.

So what is bankruptcy exactly? In the United Kingdom, only an individual – not a business or corporation – can declare themselves bankrupt if they are no longer able to pay their debts. The bankruptcy process is overseen by the UK’s Insolvency Service, and it must be approved by a court order. Bankruptcy lasts for 12 months, and at the end you’re effectively given a fresh financial start.

The application process costs £680, but there’s no minimum amount of debt needed to declare bankruptcy. If creditors are chasing you for payments, then bankruptcy can be an effective way to wipe out your major debts.

Surviving bankruptcies in the UK isn’t quite as simple as filling in the paperwork and washing your hands of all your debts. There’s much more to be considered, as you plan your way to recovery. Here are the major consequences, both good and bad, of declaring bankruptcy:

• Major debts are written off at the end of the 12-month bankruptcy period.
• Creditors can no longer harass or ask for payments from you.
• You no longer have control over your finances. Your bank accounts are closed, and an official receiver (usually a licensed insolvency practitioner) takes over financial responsibility on your behalf.
• For 12 months, you’re legally declared an undischarged bankrupt – this makes it impossible to source credit over £500.
• Major assets in your name ­– including your family home or car – can be seized and sold to pay off your debts. However if assets are held in a partner’s name, they cannot be sold.
• If you rent your home, then the landlord is within their rights to end the tenancy agreement.
• If you own a business, this can be sold in order to pay off your outstanding debts.
• If you have employment or any other source of income, then an income payment order can be issued against you. This can last up to three years and sees a percentage of your monthly pay taken to pay off debts.
• Not all debts are wiped out. You must continue to pay for personal liabilities, including student loans, child support and fines.
• Bankruptcy remains on your credit score for a minimum of six years. Beyond this, you must always answer truthfully if a potential creditor asks if you’ve ever declared bankruptcy.
• Bankruptcy is always public knowledge, and declaring bankruptcy can exclude you from positions of trust within the community. If you’re a lawyer, councillor, Member of Parliament or on any board of trustees, you can be removed from your position.

As you can see, declaring bankruptcy has positive and negative implications. If you plan on not only surviving bankruptcies in the UK, but recovering quickly, then you need to be prepared.

How Can I Recover from Bankruptcy?

Surviving bankruptcies in the UK and recovering is always going to be a challenge, but it’s far from impossible. After declaring bankruptcy, many individuals go on to purchase houses, continue their careers or start profitable businesses. Many successful entrepreneurs and business people declare bankruptcy early in their careers, taking a step backwards in the short term, but learning from their mistakes to become successful in the long term.

Ultimately, bankruptcy is designed to offer individuals a fresh, financial start and new opportunities in the future. To fully embrace this opportunity, you need to make sure you plan well for your recovery. Here are our top tips for surviving bankruptcies in the UK, and then thriving once you’ve been discharged.

1. Apply for Proof of Discharge

You’ll be discharged from the bankruptcy period after 12 months, but this is a fact that the Insolvency Service does not actually have to inform you about. Discharge happens automatically, but it helps to have proof that you’ve been discharged.

After 12 months, you can contact the Insolvency Service directly and request proof of discharge. They are obliged to send you a discharge confirmation letter, and it’s free of charge. The Insolvency Service even has a dedicated email where you can send your query. Contact them at discharge.queries@insolvency.gov.uk

A discharge confirmation letter is useful to keep in storage (both a hard copy and online). You’ll need one if you decide to try and take out a mortgage in the future. It’s also liberating to know that yes, you are discharged, and yes, you’re on the road to recovery.

2. Understand Why You Declared Bankruptcy

Once the bankruptcy period is over, it’s tempting to simply walk away and act as if nothing happened. While could be helpful in the short term, in the long term it’s more useful if you look back and try to understand where it all went wrong.

Did you take out too many credit cards? Were you living too far above your means? Did the re-mortgage payments leave you with a negative balance each month? Everyone faces their own, unique financial situation when they declare bankruptcy, but often it’s possible to pinpoint where you could have avoided it.

This knowledge and information can help you going forwards. Don’t make the same mistakes in the future, and you can avoid spiralling into debt again. At this stage in the recovery process, it can be useful to seek financial planning advice, to look at your financial past and future in more detail.

3. Find Employment and a Home

You can’t recover from bankruptcy without an income, so it’s important that you try to find a job – if you don’t still have one – after you’ve been discharged from bankruptcy.

After the discharge, you can also start your own business again. This can help you to start creating a new source of income, and could even provide the new drive you need to fully recover from bankruptcy.

Equally as important as finding employment is finding a place to live. You may have lost your house during the bankruptcy period, or your landlord may have evicted you. On the other hand, you may not have – your home could have been saved or it could have been placed under the name of a partner.

If you were unlucky enough to lose your home, then you need to secure lodgings fast. Without an address, it’s impossible to open new bank accounts or secure credit. To begin with, you may also need a guarantor – such as family or friends – in order to successfully arrange a tenancy agreement with a new landlord.

4. Make a Financial Plan

You can’t recover fully from bankruptcy unless you have a solid financial plan. Start planning early (you can start planning before you’ve even been discharged), and set out which financial goals you want to reach and when – being realistic, of course.

To plan effectively, you’ll need to start budgeting effectively. Create a weekly or monthly budget that takes into account your income and all of your expenses. Not only will this stop you from sliding back into debt, but it can help you to better understand how much you can save going forwards, and what you have leftover to spend after major expenses such as your rent.

Even after being discharged from bankruptcy, it’s possible you’ll continue to have an income payment order against you. This can last up to three years after being issued, and you’ll need to budget for any money that comes out of your paycheque to cover these payments.

5. Pay Your Bills

It sounds simple, but it’s easy to forget once you’ve been discharged that you need to keep up with your bills and repayments again!

For 12 months during the bankruptcy period, your finances and accounts will have been controlled tightly by the official receiver. This ends when you’re discharged, and you need to quickly pick up the pieces again and get back to living normally.

Paying your bills on time is more important now than ever before, because you need to start rebuilding your credit rating without accumulating future debt.

6. Rebuild Your Credit Rating

Once you’ve been discharged from bankruptcy, you can legally apply for credit over £500. However, it’s extremely unlikely that a bank or reputable lender is going to simply issue you new credit cards, approve a bank loan or give you a mortgage.

Unfortunately, your credit rating is going to be poor. In fact, your bankruptcy stays on record for six years, and during this period of time it’s going to be challenging to find anyone willing to lend you money. It’s not impossible though, and you need to start by slowly rebuilding and repairing your credit rating.

As mentioned, you need to pay your bills on time. On top of this, it might be possible to take out a secure credit card. This is a credit card with limits, but using it can help to demonstrate that you’re serious about repairing your reputation.

It will be possible for you to take out some form of loan, which can help rebuild your rating too. Be very wary of this though, as anyone willing to lend you money early after your discharge will impose heavy interest rates and stringent repayment terms. This could be a recipe for financial disaster. If you need credit, it’s best to find alternative means. Try asking friends or family to begin with and use services such as Experian to keep up to date with your credit score. 

7. Stick Within Your Means

Most important of all: stick within your means. Don’t be tempted to take out credit too early, particularly if interest rates are high, and remember to budget and to stick to that budget as best you can.

Surviving bankruptcies in the UK can be a long, drawn-out process. It’s important not to rush things, as you can quickly end up spiralling back into debt if you don’t stick within your means. After being discharged, be frugal, save what you can, and plan for your big comeback in the future.

Is Bankruptcy Always the Best Option?

Remember, declaring bankruptcy isn’t always the best option. There are other means to escape insolvency first, including individual voluntary arrangements, debt consolidation plans and administration orders.

Bankruptcy is often only used as a last resort when you have enormous debts or have little left to lose. If you have minor debts, if you own a business or have a family home to maintain, then bankruptcy could be disastrous for you.

It’s important that you always speak to an insolvency practitioner for expert financial advice before declaring bankruptcy, as there could be another avenue you have yet to consider.

Contact Irwin Insolvency for More Information on Surviving Bankruptcies in the UK

Declaring bankruptcy can be the best way for individuals to have a financial fresh start, but there are many other insolvency measures that should always be considered first.

Bankruptcy can have severe, long-term consequences, and it’s recommended to seek the advice of an experienced insolvency practitioner before declaring yourself bankrupt.

To find out more about declaring bankruptcy and surviving bankruptcies in the UK, contact Irwin Insolvency today for your free consultation.