What debts can be included in bankruptcy? 8 February 2012
James Falla (about the author)

If you are considering declaring yourself bankrupt you need to understand which debts can be included and which you will have to continue to pay. We investigate.

If you are struggling with personal debts that you cannot repay in a sensible time period, you could consider declaring yourself bankrupt.

The advantage of bankruptcy is that the debts that are included in the procedure will be taken away from you and you will no longer have the responsibility for paying them.

You may still have to make a monthly payment towards the debts included in your bankruptcy. However any such payments will be based on an amount that you can afford and will only last for three years. If you cannot afford to pay anything then you do not have to do so.

However there are some debts which are not included if you go bankrupt and you will have to continue paying these. It is important to understand which debts are included in bankruptcy.

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Unsecured debts

Generally speaking all of your unsecured debts will be included in bankruptcy.

This means any outstanding balances you have to credit cards, personal loans, store cards, catalogues bank overdrafts and payday loans are all included in the bankruptcy process.

In addition if you have tax arrears and you owe money to HMRC, this is also included in bankruptcy.

If you have been running a sole trading business and owe money to HMRC including VAT debt or you have outstanding debts with suppliers these debts will also can be included in your bankruptcy.

Debts excluded from bankruptcy

Although almost all unsecured debts are included in bankruptcy, some are not.

Specifically if you have a student loans company debt, this will not be written off by declaring yourself bankrupt.

Any court fines that you have received (e.g. speeding fines) and matrimonial debts such as child maintenance arrears are not written off by going bankrupt.

In addition to these debts which are specifically excluded from bankruptcy, if you are a home owner, it is possible for any one of your unsecured creditors to apply to the court for a charging order.

If a charging order is granted this means that the unsecured debt then becomes secured against your home. If this has happened it then cannot be written off in bankruptcy. Once your house is sold given there is sufficient equity, the debt will still be paid in full.

Can my mortgage be included in bankruptcy?

Your mortgage and any other debts secured against your property cannot be included in bankruptcy.

As such if you are a home owner and you declare yourself bankrupt you must make sure that you continue to pay your mortgage payments. If you do not then your home will be at risk of being repossessed.

If your property is repossessed there might be a mortgage shortfall if the sale price does not cover the full outstanding mortgage, secured loans or charging orders. Any such shortfall can be included in bankruptcy.

Importantly, if you declare yourself bankrupt and your property is repossessed at a later date, as long as you did not change the terms of your mortgage after going bankrupt, then any subsequent shortfall is still included. This is still the case even if you have already been discharged from your bankruptcy.

What if I forget about a debt?

Even if you have some debt that you have forgotten, as long as it exists at the time you declare yourself bankrupt it will be included in the bankruptcy process.

This is an important point because unlike the individual voluntary arrangement (IVA) debt solution, even if you do not list a debt on your bankruptcy application form, it will still be written off by the bankruptcy procedure.

A good example of this is HMRC debt which you are not yet aware that you owe because your tax return for the year to date has not yet been finalised.

Whatever the final balance to HMRC ends up as, this debt will still be included and written off even if you have already declared yourself bankrupt.

Family debts and bankruptcy

Debts that you owe to friends and family fall into the category of unsecured debt (unless they have been secured against property with a legal charge). As such these debts can and should be included in a bankruptcy procedure.

This means that if you want to continue to pay a family debt because you feel obligated to do so, this will not be possible while you are bankrupt.

If you continue to pay a family debt, these payments are seen as being unfairly preferential and the family member could be forced to pay back what you have given them to the official receiver.

Clearly this situation can cause problems if the family member in question is relying on receiving a payment from you to maintain a debt that they took in their name on your behalf.

Of course there is nothing to stop you starting up your payments to a family member again when you have been discharged from bankruptcy. However this will normally not be for at least 12 months.

Take bankruptcy advice

In most cases understanding which of your debts can be included in your bankruptcy is relatively simple.

The general rule is that all unsecured debts are included and all secured debts are excluded. However as we have seen, there are many exceptions.

Depending on the type of debts that you have, before deciding to declare yourself bankrupt you should therefore make sure that you get expert bankruptcy debt advice so that you understand which debts will be included and which will not and how to manage this situation accordingly.

It is especially important to take further advice if you are a homeowner or run your own business.

Related bankruptcy articles

If you are interested in reading more news and expert articles about bankruptcy, please click on the following link:

http://www.beatmydebt.com/forum/viewforum.php?f=51

What to do next

If you are struggling with debt and are considering bankruptcy, visit www.beatmydebt.com

Our experts are available to speak to you about the bankruptcy option and offer further help and advice.

Our vibrant online debt forum gives free access to experienced industry experts and others who have suffered with debt problems and have been through the bankruptcy process themselves.

Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.