If you’re considering declaring bankruptcy and currently receive state benefits, this will affect how your bankruptcy is dealt with. This article from insolvency experts, Bankruptcy Clinic, explains some of the key issues that you’ll need to be aware of. We also look at the linked issues of what will happen to your tenancy if you rent your home, and the effect on your bank account once you’ve been made bankrupt.
If you receive benefits (or if you’re on a low income), it’s cheaper to go bankrupt as you don’t have to pay the £180 court fee. However, you’ll still need to pay the Official Receiver’s fees, which total £525 for an individual bankruptcy application in England or Wales. You’re required to make this payment upfront to the court, in cash, when you present your bankruptcy paperwork so you’ll need to consider where this money will come from.
Benefit payments and bankruptcy
When you complete your initial bankruptcy paperwork, you’ll need to state all your income and outgoings, including details of any benefit payments or tax credits you receive. After your Bankruptcy Order has been made, the Official Receiver will discuss this information with you in more detail, usually on the phone. You’ll need to let them know if there have been any changes to your benefit or tax credit payments since you completed the initial paperwork.
If benefits are your only source of income, the Official Receiver won’t ask you to make any payments to your creditors during your bankruptcy. However, if you have other income such as wages from a part time job, the Official Receiver will look at this to see if you have more than £20 left over each month after paying for your essential living costs, such as rent, food and fuel.
If this is the case, you may be asked to make an Income Payments Agreement (IPA) that could last for up to three years, even if your bankruptcy is discharged after 12 months. If you don’t agree to an IPA, the Official Receiver may apply for an Income Payments Order (IPO) to be made against you in court.
Your eligibility for benefits
Bankruptcy itself doesn’t affect your eligibility to receive benefits. But other changes in your life may do so. For example, you may return to work after a period of unemployment or parental leave, or you may recover from an injury or illness that entitled you to receive disability payments. On the other hand, you could become entitled to new benefits for opposing reasons.
Under the terms of your bankruptcy, you’re obliged to tell the Official Receiver about any changes to your personal finances, including benefit payments and tax credits. This may result in any amount you’re asked to pay your creditors through an IPA or IPO going up or down, or starting or stopping.
Benefit overpayments as bankruptcy debts
If you’ve been overpaid any benefits or tax credits in the past, these will be included in your bankruptcy documentation if the end date of the overpayment fell before the date that your Bankruptcy Order was made.
The exception to this is if the overpayments were obtained by means of fraud, in which case the amount can’t be included in your bankruptcy. You could be subject to civil or criminal proceedings, and the Official Receiver might also apply to the court for a Bankruptcy Restrictions Order, which could extend the terms of your bankruptcy by up to 15 years.
Associated areas to consider
- Bankruptcy and your tenancy
If you rent your home, your landlord may evict you as a result of your bankruptcy. This is because many tenancy agreements include a clause stating that declaring bankruptcy will cause the agreement to be terminated. For the same reason, if you do get evicted, it could be hard to find somewhere else to live. If you’re worried about losing your home, speak to your debt adviser or the Official Receiver straightaway so they can help.
- Your bank account
When you’re declared bankrupt, you’re normally required to close your bank account and open a new one. If your current bank is listed as one of your creditors, this will definitely need to happen. When you open a new bank account, your options will be more limited than before as most providers restrict the services they offer to undischarged bankrupts.
Take the time to research your options carefully and when your new account is open, make sure you tell your employer (if you have one) and any organisations that pay you benefits or tax credits to use your new details from now on.