Bankruptcy - How it affects you

Bankruptcy affects many different aspects of your life. Here's how:

In relation to your creditors

If you declare bankruptcy, you must not make payments directly to creditors. Creditors to whom you owe money when you are bankrupt make a claim to your trustee. They should not ask you directly for payment; if you receive any requests, pass them immediately to your trustee to deal with and tell the creditor that you are bankrupt. There are some very limited exceptions to this non-payment rule. The main ones are:

• creditors who have a mortgage or charge on your home (if mortgage payments are not made, the lender may sell your home);
• court fines and other obligations arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act of 1991.

Suppliers of services to your home (gas, electricity, water and telephone) may not demand from you payment of bills in your name which are unpaid at the date of the bankruptcy order. They may ask you for a deposit towards payment for further supplies or could arrange for the accounts to be transferred into the name of your spouse or partner.

You must pay continuing commitments such as rent (if you rent your home), together with any debts you incur after the bankruptcy.

Your assets

You will no longer control your assets. If you have a business, this will normally be closed and your employees dismissed.

You can keep the following items unless their individual value is more than the cost of a reasonable replacement:

• tools, books, vehicles and other items of equipment which you need to use personally in your employment, business or vocation;
• clothing, bedding, furniture, household equipment and other basic items you and your family need in the home.

All these items must be disclosed to the Official Receiver who will then decide whether you can keep them.

The Official Receiver will take control of all your other assets upon the making of the bankruptcy order. He or she, or any insolvency practitioner who is appointed as trustee, will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and your creditors.

The trustee may apply to the court for an order restoring property to him or her if you disposed of it in a way which was unfair to your creditors (for example, if you had transferred property to a relative for less than its worth).

The trustee may claim property which you obtain or which passes to you (for example, under a will) while you are bankrupt and may ask the court to order you to pay part of your wages, or salary or other income to him or her if your income is more than you need to live on.

Your pension scheme

The effect of the bankruptcy on your pension rights will depend on such things as:

• whether you are a member of an occupational pension or have a personal pension;
• any scheme rules about what happens in the event of bankruptcy; and
• the date at which your pension becomes payable to you.

You and your spouse or any dependant who has an interest in your pension, may wish to seek independent advice. But you must disclose full details of the pension to the Official Receiver/trustee who can consider whether there is an interest which passes to him or her.

Your life insurance policy

Generally, your trustee will be able to claim any interest that you have in a life insurance policy. The trustee may be entitled to sell or surrender the policy and collect any proceeds on behalf of your creditors. If the life insurance policy is held in joint names, for instance with your husband or wife, that other person is likely to have an interest in the policy and should contact the trustee immediately to discuss how their interest in the policy should be dealt with. You may want the policy to continue. Ask your trustee: it may be possible for your interest to be transferred for an amount equivalent to the present value of that interest.

If the policy has been legally charged to any person, for instance an endowment policy used as security for the mortgage on your home, the rights of the secured creditor will not be affected by the making of the bankruptcy order.