Cost of Bankruptcy - Filing Costs

The filing costs for bankruptcy are actually quite small and are as follows:

Chapter 7 – $299

Chapter 13 – $274

Cost of Bankruptcy – Legal and Counseling Costs

You will probably need to assistance of a attorney to file for bankruptcy.  There are also new regulations that require you to attend credit counseling before declaring bankruptcy.  Typical costs for these are going to be in the region of $700-$2000

Getting Credit and Insurance After Bankruptcy

Your bankruptcy will stay on your records for 10 years (or 7 years for chapter 13).  During this period you will find it much more expensive to get credit, including mortgages (for chapter 7 bankruptcy you will probably be unable to get a mortgage at all for 2 years).  In the current climate you might find it hard to get a mortgage at all.  Insurance companies will use credit records, and consider people that have been bankrupt a higher risk.  This will increase your premiums.

The Emotional Cost

There is much less stigma attached to bankruptcy than there used to be, but it’s still there.  The effect on your family and relationships might be significant, you are certainly going to find out how strong your relationship is.  If you have been hiding debts from your family then the double shock of also declaring bankruptcy will push a lot of marriages to breaking point.

Bankruptcy Types – Chapter 7

This is full bankruptcy for the most serious debt situations where the debtor has no or little income. Recent legislation restricted access to this form of bankruptcy as it was felt that too many people were taking advantage of it to avoid their debts.  Some of the new requirements include attending credit counseling and the need for additional legal advice.  This type of bankruptcy stays on your credit file for 10 years and usually you will not be able to get a mortgage for 2 years.

Bankruptcy Types – Chapter 13

This bankruptcy type is for people that have a serious debt problem but have earnings and can afford to pay something towards paying off their debt.  In this case the debtor will pay an agreed amount into their bankruptcy over a period of years.  At the end of this period all of their debts will be written off.  This form of bankruptcy stays on your credit file for 7 years. If you are a UK rather than a US resident, this type of bankruptcy is similar to an individual voluntary arrangement.

Common Features

Mortgages are not included in a bankruptcy and whether the debtor gets to keep their home or not will depend on state-by-state regulations regarding exemption of the family home from the bankruptcy estate,

Bankruptcy Hearing – What Happens

In the case of debtor petitions (people declaring themselves bankrupt) the procedure is extremely simple.  You make an appointment at your local court and at this time you will be sent a bankruptcy form to fill in.  Please take advice when filling in this form because this may have a big affect on how much money you have to pay into your bankruptcy.  The hearing itself will just consist of the judge reviewing the bankruptcy form and perhaps asking a couple of questions to confirm that you are unable to pay your debts.  As long as you have the required court fee you will be declared bankrupt immediately and all of your unsecured debts will be removed from you.  That’s it!

If a creditor is attempting to declare you bankrupt then you really need to seek legal advice if you want to avoid this.

In the UK there is almost never any need for the removal or sale of a person’s goods as a result of bankruptcy.  You must remember that by entering the bankruptcy process you have joined a court/legal led process that is designed to produce the maximum reasonable return for your creditors.  The insolvency service have no interest in the threats and intimidation that are employed by debt collection agencies.  For normal people (i.e. if your house isn’t stuffed with valuable antiques) then the insolvency service will have no interest in the contents of your house because the amount that they would raise at auction would be less than the cost of collecting/selling it.  Just indicate on the bankruptcy form that you don’t have anything of value in your home and in almost all cases your home will not be visited by court officials.

If they did visit then the list of exclusions to what they can take is long:.  Things that you need for day-to-day living like fridges, chairs, 1 TV.  Things that are jointly owned or not owned by the debtor personally (children’s toys etc. etc.).

The type of things that you might lose are cars (unless the debtor can prove that it is needed for their job)/boats/caravans if they are owned by the debtor.  If large assets like this are owned jointly then they would need to be valued and half their value would need to be paid into the bankruptcy.

If you and your partner are staying together you should consider whether there is any possibility of removing the family home from the ownership of the debtor before they declare themselves bankrupt.  To do this it is not necessary to change the name on the land registry entry or any details of the mortgage.  All that is required is to transfer the “beneficial interest” that the debtor has in the home, which for most couples will be half the value of the equity in the home over and above the mortgage and any secured loans. E.g:

If a couple own a home valued at £250,000 and have a mortgage of £200,000 then the beneficial interest of each person would be £25,000.  Note that a genuine valuation (obtained by averaging valuations from 3 estate agents) needs to be used.  You cannot get away with under valuing your home.

In this instance the partner that is not declaring bankruptcy would need to pay the one that is £25,000 for their beneficial interest in the home (you need to get some documents drawn up by a solicitor to do the transfer properly).  This money could either come from the partners own money, or from relatives, or from a loan or re-mortgage in the sole name of the non-bankrupt partner.  This last option used to be very popular with the ready availability of self-cert mortgages but has become rather more difficult to arrange at the moment.  Consult a specialist mortgage broker (don’t even bother approaching a main-stream lender) to see what is available.

If you there is too much equity in your home for you to be able to afford to buy out your partner then you might consider trying to delay the bankruptcy until house prices have fallen further.  Lastly, if you are in negative equity and you are sure that you and your partner will be able to afford to continue to pay the mortgage then you will be able to buy your partner’s beneficial interest for a notional sum of £1.  It is important to consider whether you and your partner are really committed and able to pay the mortgage, since if you have the house re-posessed after your partner has been declared bankrupt then you will both be saddled with a new debt called a “mortgage shortfall”.

If the beneficial interest is transferred as described above then the administrators of the bankruptcy will not be able to force the sale of the family home.  It is also worth noting that most holders of unsecured debt will be more willing to accept “full and final” offers to settle debt once they know that the debtor does not have any major assets. 

The good news is that mortgages (being secured debts) are not directly affected by bankruptcy which only applies to unsecured lending (credit cards, personal loans etc.).  As long as you and your partner have the income to pay the monthly mortgage payment then this will continue as normal.

The bad news is that the value of your partner’s equity in the home will probably need to be paid into the bankruptcy to provide funds to pay back your creditors.  In the UK this would always be in the case but in the US there are state-by-state rules on whether your primary residence is exempt from bankruptcy.

In the UK you will be given a period of 12 months from the date that bankruptcy is declared to reach a settlement with the person administering the bankruptcy (either a trustee or the insolvency service).  If no agreement can be reached then a sale will be forced after the 12 month period has passed.

If the value of your home has dropped to below the value of the mortgage then you can buy your partners interest in the home for a notional figure.  This is one of the rare occasions where negative equity is a good thing. 

Declare Myself Bankrupt and Lose my Home? 

There is no reason why you should have your house re-possessed just because you have declared yourself bankrupt.  So long as you have the income to pay your mortgage payments everything will go on as before.  You may have to sell your house to pay your share of any value above the outstanding mortgage amount into your bankruptcy (in the US there are state-by state rules regarding exemptions for your home).  If this is the case then the courts can force you to sell your house.  This can sometimes be avoided by careful planning before bankruptcy is declared, by selling your share of the house to a relative or your partner.

You should consider the bankruptcy alternatives and find as much information on bankruptcy as you can.  It is a serious step and you should not consider filing for bankruptcy without thinking through the consequences. 

If you live in the UK and share ownership of your house with a partner then a sale will not be forced until at least a year after bankruptcy is declared.  This is nor part of bankruptcy law but is the normal procedure followed by the insolvency service.

If you have a debt with a bank that fails then your debt will form part of the banks assets that will be sold off.  It is very likely that you will have to continue paying your debt in exactly the same way that you have always done.  There is a small possibility that if you were not on a fixed interest rate that you will have to pay a higher rate to the new owner of your debt.  The only way that you are likely to benefit is if the debt was sold at below its face value.  In this case the new creditor may be willing to accept a settlement figure lower than the face value (since they would still be making money).

If you are a depositor with a bank that fails then you will have to rely on the compensation schemes put in place by individual national governments.  In the UK this applies to all deposits by individuals up to £35,00 (shortly to increase to £50,000).  This is per individual so if you have a joint account the amount covered will be doubled to £70,00/£100,00.  It is also per registered financial institution so it is possible to spread even very large deposits around a number of financial institutions to make sure that they are covered.  Beware of seemingly separate banks that are actually registered under their parent owner (e.g. the Santander Group in the UK) as these will all count as a single financial institution.

In addition to the specific insurance schemes it should be noted that no government wants to see any depositors lose money in the current climate, as it would damage confidence in that country’s financial institutions.  To date no individual has lost money in a major UK or US bank during the current financial crisis.

The irony is that the debt relief solution that is most suitable for people with extreme financial difficulties (bankruptcy) is the one that is not free. Not only that, it requires you to pay an up-front fee.

Informal Debt Relief

There are a wide range of companies and charitable organizations offering informal debt relief solutions. These usually involve either persuading the creditors to accept a longer time period for the repayment of their debt (debt management plans) or persuading them to accept a figure that is lower than the debt owed (debt write-off). None of these solutions are legally binding on the creditors and so rely on the experience of the debt management/counseling company and the particular mix of creditors for their chances of success. With informal debt relief it is always possible to find debt charities that will work with you for no fee or companies that will only charge a fee if they arrange a successful resolution. In this way, if the fee is taken out of the settlement to the creditors then their services can be effectively free to you, the debtor.

Supervised Debt Relief

This includes Individual Voluntary Arrangements (IVAs) in the UK and Chapter 13 bankruptcy in the United States. These debt relief solutions require the services of a qualified person to setup and monitor the agreement (which typically involves paying back a proportion of the debt owed over an agreed period) and the involvement of the court to ratify it. The requirement for legally qualified advice and the involvement of the courts mean that these debt relief solutions are never free. In some circumstances they can be structured (in the UK) so that the fees are taken from the agreed monthly payments, meaning no up-front fees.

Bankruptcy

I’ll say it again, it seems very unfair that a debt relief solution that you would probably only select if you were in a financial crisis requires you to pay an up-front fee. Both in the US and the UK there are court fees to be paid to declare yourself bankrupt (in the US this applies to both Chapter 7 and Chapter 13 bankruptcy). The only hope of being able to declare yourself bankrupt if you cannot raise the court fees is to look for a local charity that will pay your bankruptcy costs. These do exist but you will probably need to do some local research to find them, and be prepared to justify why you need their help.

What are the Consequences of Going Bankrupt

In the UK, the consequences for bankrupts are quite severe. You will have your bank accounts frozen, you will have to sell any major assets that you own (house, car etc.), and you may have to pay some money each month out of your income to the insolvency service (this is quite rare). Certain professions do not allow you to be a bankrupt, e.g. accountancy or police.

You will not be able to obtain credit whilst you are bankrupt and you will find it extremely difficult to obtain once you have been discharged from your bankruptcy.

There is a risk of a criminal conviction if the investigation into your finances finds that you were reckless in the way that you got into debt (e.g excessive gambling etc.) and had no intention of paying it back. These types of convictions are quite rare and will only be applied in the most serious of circumstances.

What are the Benefits of Bankruptcy

Bankruptcy is the quickest route to becoming debt free. Once you have presented your petition and been declared bankrupt you will immediately be free of all your unsecured debts. This compares favorably with the timescale for an individual voluntary arrangement that can take 5 years or more to clear your debts.

Alternatives to Bankruptcy

If your situation is serious enough to consider bankruptcy then the only realistic alternative that will resolve your debt problem in a reasonable time is the Individual Voluntary Arrangement (IVA). This is suitable for people that have a profession that will not allow bankruptcy and also makes it more likely that you will be able to keep your home. As previously noted it will take longer to resolve your debt problems (5 years is the standard period but this can be shortened by making a lump-sum payment from a remortgage). There will be no investigation into your finances other than the proposal that the Insolvency Practitioner puts forward to your creditors.

Making the Decision Between Bankruptcy and an IVA

You should always seek qualified advice when deciding between bankruptcy and an IVA. The following is offered as guidance only:

You should try to arrange an IVA if: You have significant assets that you want to protect. You are in a profession that doesn’t allow you to be bankrupt. You are worried that your conduct might leave you open to criminal conviction.

You should consider bankruptcy if: You don’t own you own home. Your job is not money related and there are no known restrictions on you becoming bankrupt.