Bankruptcy is often considered as the last case scenario for people in debt. It’s a solution to debt which few people genuinely wish to enter, however for some people bankruptcy would in fact be the easiest option.
In the UK bankruptcy is different in England, Wales and Northern Ireland when compared to Scotland. However, across the UK people can enter bankruptcy and not pay anything each month towards their bankruptcy.
I don’t agree that people should be able to “get out their debt” without having to pay anything each month, unless they can’t afford it.
Who Pays In Bankruptcy
There are people who pay when they have entered bankruptcy and those who do not.
Bankruptcy is a debt solution for people who are insolvent and cannot afford to repay their debt. In England, Wales and Northern Ireland there are two routes into bankruptcy, a Debt Relief Order & the traditional bankruptcy at court. In a Debt Relief Order it costs £90 to enter, whereas bankruptcy at court costs £700 (this can be reduced to £525 in some situations).
In Scotland, there are two routes to make yourself bankrupt. The routes to bankruptcy in Scotland are the Low Income Low Asset (LILA) & Certificate of Sequestration. To make yourself bankrupt in Scotland costs £200.
These fees must be paid by everybody regardless of person situation. So, how do you know which bankruptcy is right for you?
The Best Way to Go Bankrupt?
I can’t stress this enough, get professional debt advice before trying to enter any debt solution. Debt advice charities exist to provide free debt advice and help with the bankruptcy process. Only a fool would enter bankruptcy without seeking advice first. Don’t be a fool!
England, Wales & Northern Ireland
The two main options to enter bankruptcy in England, Wales & Northern Ireland are the Debt Relief Order and the court bankruptcy
Debt Relief Order (DRO): £90
The criteria to enter a Debt Relief Order is
- The debt must be below £15,000
- You must have less than £50 per month available to pay towards your debt (based on necessary guidelines… i.e. £900 for food for a couple won’t be accepted)
- You don’t own your own home
- You have less than £300 worth of assets
- Resided in England, Wales or Northern Ireland within the last 3 years
Court Bankruptcy: £700 (maybe £525)
The fee to enter bankruptcy at your local court will depend on your situation. If you are unemployed or living solely on benefits the fee is £525, otherwise it’s £700 per person. Yikes! A lot of money?! Going bankrupt often takes time to save the money so generally it’s best to stop paying your creditors and tell them you’re going bankrupt.
People who don’t meet the criteria for a DRO would enter bankruptcy at their local court. If you are solely living on state benefits, regardless if you receive £500 per month or £5,000 per month, you will not be asked to pay anything towards your bankruptcy each month.
State benefits consists of jobseekers allowance, income support, disability living allowance and many more Government provided state benefits.
LILA or Certificate of Sequestration? The decision on which debt solution to enter in Scotland is a tricky one. If you qualify for the LILA it’s a more straight forward process.
LILA is essentially for people who have assets worth less than £10,000 (maximum of £1,000 value per asset), do not own their house (even if it’s negative in equity) and earn less than £237.50 per week.
If a person is only in receipt of state benefits, once again, this cannot be taken into account when determining if somebody should be making a repayment towards their debt. Repayments in bankruptcy can only come from earnings.
What, Just Write It Off?
In bankruptcy debt which cannot be repaid over the necessary period of time is written off. Bankruptcy lasts for 1 year but if you have to contribute towards your debt then the payments last for 3 years.
After this the remaining debt is written off. There are negatives such as it can affect your job, credit file and assets (e.g. if your house has significant equity then it may need to be sold). However, for many people they can basically pay the money to enter the bankruptcy solution and write off what they can’t afford.
Strangely, there are people earning thousands of pounds in state benefits every month, spending £200 a month on clothes and will never be asked to pay anything back towards their debt. At the same time, I meet people who work 40 hours per week and are having to pay £150 per month towards their bankruptcy, which means the amount they have for food, clothes and heating is diminished.
People living on state benefits should be assessed like any other person. If they have a disposable income every month of £200 then either they are receiving too much benefit or should be asked to contribute into their bankruptcy.