There is a strong link between debt and poor mental health and it is important that if your debt is making you feel anxious and depressed that you seek help and recognise that there are steps you can take to tackle the problem.
If you are completely out of your depth with unsecured debts, unpaid bills, credit cards or payday loans, and can see no way out, there are options available to you, including taking the big step to declare yourself bankrupt.
Bankruptcy is a legal process where your debts are written off. It gives you the chance to start again with a clean slate and halt the bombardment of letters, fees and interest from the banks and organisations that you owe money to.
It has many downsides, however, and is definitely not a decision to be taken lightly.
Here’s what you need to understand.
How bankruptcy works
When you declare bankruptcy, the court takes over your money and distributes it to those you owe on your behalf, ending your relationships with your creditors, even if you do not have enough money to cover your debts in full.
Any assets you own, including your house, car and possessions may be sold to pay your debts.
You can apply online for bankruptcy to the Insolvency Service in England and Wales, and by paying a fee of £680.
An adjudicator will decide within 28 days whether to accept your application and, if they do, your bank accounts will be frozen. Your money and property, known as your “bankruptcy estate”, will be taken over by the official receiver who will look at what you owe and distribute any assets to creditors.
You are allowed to keep some “exempt goods” such as household basics or a car if you need it for work and a reasonable amount of income to live on.
During the time you are bankrupt you cannot borrow more than £500 without declaring that you are bankrupt, which usually makes it difficult to take out any loans.
After a year you will be discharged from bankruptcy, your debts will be legally written off, no more interest or fees can be charged and you can no longer be contacted by your existing creditors.
Some debts may remain, however, including student loans, which are dependent on income and owed only when you have sufficient income to repay them, and court ordered fines or things like child maintenance arrears.
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Your mortgage may still be in place if you have stayed in your home, you’re not in mortgage arrears, and it hasn’t been sold to settle your other debts.
What are the effects of bankruptcy?
Though bankruptcy ends after one year, its impact on your finances will remain for much longer. If you have a big enough income, you’re not on benefits and have more than £20 of disposable income a month, you may need to continue payments to the official receiver for three years to pay down more of your debts. This is known as an income payment arrangement.
What’s more, bankruptcy will affect your credit file for six years, during which time you may struggle to take out any credit at all, including a mortgage or a loan.
If you are renting a home your landlord may end your tenancy. You may also lose your home if you are unable to pay your mortgage, or if your property was sold to pay your debts. You might then find it challenging to rent or buy a new property because of your damaged credit file.
Some professions, such as those in law and finance, do not let you continue in employment if you are declared bankrupt.
Bankruptcy will be recorded on a public register, so others will be able to see your financial status. It may also affect your immigration status.
These downsides can be significant. Before deciding to apply for bankruptcy it is worth seeking professional debt advice. Debt charities like Citizens Advice and StepChange both have extensive free help and can discuss anonymously with you whether your situation is suitable for bankruptcy or whether there may be better options. They will then guide you through the process of applying for bankruptcy and what is involved. StepChange’s online advice tool is a good place to start.
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