What Actually Happens When You Go Bankrupt

Lee Brookes will never forget the day he went to court to declare himself bankrupt. "It took some serious guts. I had to go to a Magistrates' Court and there were all these people there for various criminal reasons and you wonder how you ended up there," he says. "It's not a nice place."

He was 39 and £30,000 in debt, run up on store cards, credit cards and overdrafts since the age of 21. For several years he'd be using payday loans when he ran out of normal credit. Most of it went on DVD players, iPads and other hardware, or booze, which he used to self-medicate a bipolar disorder. But after spending more than £2,000 that was not his own in one weekend in Paris, he was at the end of the line.

At court, he handed over his forms and waited to be called before a judge. In the end, a clerk came out and said the judge had approved his application. He was given some forms, told more paperwork would come in the post, and left to go home and start his new life. He was so relieved to be dealing with his problems that he slept properly for the first time in years.

Bankruptcy and other kinds of insolvency happen when someone has run up more debt than they are able to pay back. Women are more likely to go bankrupt than men, and they're most likely to go bankrupt between the ages of 35 and 44, followed by ages 25 and 34. Bankruptcy hit an all-time high during the financial crisis, but has since fallen each year, to 17.6 adults per 10,000 in 2015. This is partly because the Government introduced two alternatives to bankruptcy to make it easier for people to organise their debts: Individual Voluntary Arrangements and Debt Relief Orders. Since Lee went bankrupt in 2014, the rules have changed so you can apply online, meaning you no longer have to work up the courage to go to court.

It might not sound like a good thing that the Government is making it easier for people to go bankrupt, but it is. It's recognition that no one should have to suffer an insurmountable burden of debt alone. It gives people struggling with their finances more options for ways to deal with it. Now, if you go bankrupt, it's not announced in the paper like it used to be. You're bankrupt for just one year, instead of three. After six years, bankruptcy disappears from your credit record completely.

"There is a lot of unnecessary stigma around bankruptcy," says Michael Agboh-Davison, debt advice co-ordinator, StepChange. "It brings to mind images of debtors prison or something that stays with you for the rest of your life and leaves you penniless and homeless. But bankruptcy in the 21st Century is really nothing like that. There can still be significant consequences, but if you have debt that you're going to be paying off for many years it is worth considering the option."

Sally Francis, senior writer at MoneySavingExpert.com, says bankruptcy should be the last resort for resolving debts. It's often reserved for people whose debts are so bad, there is no other way out. "If you are facing bankruptcy, view it as a fresh start and somewhere you never want to be again. Ensure it really is the only option for you, and be prepared to deal with it head on," she says.

Bankruptcy makes it a lot more difficult to borrow money. If you wanted to get car insurance, you might have to pay for it upfront rather than monthly. Any assets that you own, like houses or cars, can be repossessed. For someone with a home and a family, that can be disastrous. "Being made bankrupt and having my home repossessed had a terrible effect on my mental health and I don't think I will ever feel secure again," said one respondent to a survey about debt by the Money and Mental Health Policy Institute.

It's also expensive, costing £680. You can pay this off in instalments of as little as £5. Student fees and court fines can never be written off. Some professions, like some law firms and accountants, don't let people who have gone bankrupt keep working.

That's why it's essential to speak to advisers at the Citizens Advice Bureau or StepChange who can discuss other options. They can help you arrange an Individual Voluntary Arrangement, where your debts are consolidated into one monthly payment that you can afford for five or six years, after which time any remaining debt is written off. Often, this allows homeowners to keep their homes. Or you might be eligible for a Debt Restructuring Order, which is much cheaper at £90.

When is bankruptcy worth it? Michael gives the example of a younger person who has racked up several thousands in debt on credit cards and overdrafts at university. Say that person wanted to buy a house in their thirties. They could spend 10 to 15 years paying off massive amounts of debt before they can start saving for a deposit, or they could go bankrupt and start saving straight away. By the time they wanted to buy, there would be no record of bankruptcy on their credit file. "By the time you're in your mid-thirties you have a chance to get your life back on track without the credit cards and store cards from your student days," he says.

It can also provide relief for people whose debt has started to impact their mental health. After his trip to court, whenever a bailiff turned up asking for money, Lee could hand them his insolvency papers and they would know to contact the Insolvency Service rather than hassle him for money. This can be essential for people suffering from anxiety, paranoia and exhaustion from the pressure of keeping up with repayments. "After I went bankrupt I realised that I can sleep, I'm not stressed anymore, I don't get debt collectors coming to the door," Lee says.

Lee has an arrangement to pay back as much debt as possible in monthly chunks. "That's huge for me. Because I've not walked away from it, I'm owning up to it and people are getting their money back," he says. It also made it easier for him to tell other people. "Some people thought it was great that I was paying it back. My parents were much more supportive than I thought they would be because they were pleased I had stood up to it."

Whatever happens, remember you are not alone. More than a third of young people have debt worth £3,000, excluding student loans. "Everyone knows someone struggling to pay debts, says Michael from StepChange. "And pretty much everyone knows someone who has gone bankrupt, even though they might not have told you that."

The stigma surrounding debt can lead to feelings of shame and embarrassment when people find they're in a situation they can't get out off. This can make it harder to ask for help. "I would say to those people: talk to someone," Lee says. "I've regretted getting into debt, but I've never regretted going bankrupt. I'm in a much better place now."

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Aviva.

@hazelsheffield

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