There is often confusion about how long Bankruptcy will last and how long the other affects of this solution will remain in place. We explain all the different time scales involved.
The time that Bankruptcy lasts is commonly misunderstood. After changes to the Enterprise Act which were implemented on the 1st April 2004 the standard period was reduced from between 2-3 years to 12 months. This means that if you declare yourself Bankrupt today the process itself will usually last just 1 year.
After this you will then be discharged and free from the restrictions of a bankrupt person. For example after you are discharged 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.
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.
BMD Tip: On the 1st October 2013 changes introduced by the Enterprise and Regulatory Reform Act mean that the OR no longer has the power to discharge before 12 months. As such everyone who goes Bankrupt from now on will almost certainly remain so for 12 months.
The OR does have the power to extend the time you are Bankrupt past twelve months but again this is unusual. Generally it only happens if you have already been Bankrupt before you or are not cooperating for example you have tried to hide assets or income.
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How long will payments to your creditors last after Bankruptcy?
Once you have declared yourself bankrupt, the official receiver will review your income and living expenses budget. If they feel that you have any disposable income they will normally ask you to make monthly payments towards your debts in the form of an Income Payment Agreement (IPA).
If this happens than these payments will last for three years. As such they will continue after the date you are discharged. This is possible because the Bankruptcy itself and the monthly payments are governed by two separate agreements.
BMD Tip: If you have an IPA in place and your income improves you will be asked to pay more. This is the case even if you have already been discharged from your Bankruptcy.
How long will Bankruptcy affect your credit rating?
When you are declared Bankrupt this is recorded on your credit file from the date the bankruptcy started. This record will then remain on your file for 6 years. As such even once you have been discharged the record will remain on your credit file.
During this period, anyone who carries out a credit check on you will then be made aware that you have been bankrupt. This will have a negative effect on your ability to borrow money. However this does not mean that you will never be able to get credit in the future or get a mortgage.
Once you are discharged there is nothing to stop you from applying for credit once again. However it is likely that most applications will still be refused for some time to come. The longer the time that passes after you are discharged the more chance you will have to get credit at reasonable rates of interest.
BMD Tip: Your credit rating will really only start to significantly improve start to improve once the record has been taken off your credit file. However there are some things you can start to do to help this process as soon as you are discharged.
Busting the bankruptcy timescle myths
Since April 2004 bankruptcy has become a much more appealing option to deal with a personal debt problem. The assumption that it will last for many years is wrong. In fact the vast majority of people who go bankrupt nowadays are discharged after just 12 months.
However the effects of bankruptcy will last a little longer with an IPA lasting for three years if you get one and and the record remaining 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 your credit rating will be poor for six. 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 more than six years.
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