More and more people are choosing bankruptcy to resolve their personal debt problems. However there is often confusion about how long a bankruptcy will last and how long the other affects of bankruptcy will remain in place. We consider the timescales involved with bankruptcy.
A popular misunderstanding about bankruptcy is how long it lasts. After changes to the Enterprise Act which were implemented on the 1st April 2004 the length of time over which a person is bankrupt was reduced from between 2-3 years to 12 months.
This means that anyone declaring themselves bankrupt after 1st April 2004 will normally be discharged after 12 months and then be free from the restrictions of a bankrupt person. For example after you are discharged from your bankruptcy any financial windfalls you receive are yours to keep (other than PPI compensation) and you can again become the director of a limited company.
However even after you are discharged you may still be affect by bankruptcy for some time to come. We investigate why this could be.
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Can the length of time you are bankrupt change?
There are some occasions when the official receiver (OR) might discharge you early from your bankruptcy. This means that your bankruptcy will end before the full twelve months is up. However this will only happen when the OR believes there is no further benefit to you remaining bankrupt.
At the discretion of the official receiver, your bankruptcy could last longer than twelve months, but again this is unusual.
Generally your bankruptcy will only be extended past twelve months if either you have already been bankrupt in the past or are not cooperating with the official receiver.
Payments to your creditors
Once you have declared yourself bankrupt, the official receiver will review your income and reasonable living expenses To understand what is considered a resonable bankruptcy living expenses budget please see the BeatMyDebt.com living expenses guide:
@#DOWNLOAD: Living Expenses Guide@#
If the OR feels that you have any disposable income – spare money each month after being able to pay for your living expenses – you will normally be asked to make payments towards your debts in the form of an income payment agreement (IPA).
A bankruptcy IPA will last for three years. This means that although you will normally be discharged from your bankruptcy after 12 months if an IPA is put in place by your official receiver this will still remain in place for three years from the date it was set up.
It is important to understand that while you have an income payment order in place if your income improves you will be asked to pay more. This is the case even if you have already been discharged from your bankruptcy.
Affect of bankruptcy on your credit rating
When you are declared bankrupt, the bankruptcy will be recorded on your credit file. This record will remain on your credit file for 6 years from the date you were bankrupt
During this period, anyone who carries out a credit check on you will then be made aware that you have been bankrupt in the past 6 years.
Even once you have been discharged and you are no longer a bankrupt person, the record will remain on your credit file.
Clearly this will have a negative effect on your ability to borrow money. However, declaring yourself bankrupt does not mean that you will never be able to have credit in the future or get a mortgage.
You should not be able to get additional credit while you are still bankrupt. However, once you are discharged it is possible to borrow once again.
Ultimately whether you are able to get credit will depend on the criteria used by the lender you approach. Some HP and mortgage companies may well be able to offer you a loan shortly after you are discharged, however, you must expect to pay a relatively high interest rate.
Generally speaking the longer the time that passes after you are discharged from your bankruptcy, the more opportunity you will have to take credit at reasonable rates of interest.
Busting the bankruptcy myths
Since April 2004 bankruptcy has become a much more appealing option to deal with a personal debt problem.
The assumption that a bankruptcy will last for many years is wrong. In fact the vast majority of people who declare themselves bankrupt are discharged after just one year.
However, the effects of bankruptcy may last a little longer. A bankruptcy income payment agreement will last for three years and the record of bankruptcy will remain on your credit record for six years.
However, these time scales are still favourable when compared to other debt solutions. Payments in an individual voluntary arrangement (IVA) will last for five or six years and if you use a debt management plan (DMP), your credit rating will remain poor until your debts are paid or settled in full which could easily be six years or more.
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