Bankruptcy And Benefits

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What help will I get if I make myself bankrupt, when I am on benefits?

Chances are if you’re reading this then you are already considering bankruptcy proceedings. As such the most important thing to remember is not to panic, because despite the fact the situation seems distressing at the moment, insolvency is a process that’s actually designed to help, not hinder your financial stability in the future.

To find yourself considering bankruptcy, or being threatened with bankruptcy by creditors, is certainly stressful. However, it can be far more alarming if you already make ends meet with assistance from government benefits, given the fact this indicates a low income. Common fears amongst individuals in this scenario often centre on how they can hope to survive whilst paying back monies owed when they were already living without a surplus cash flow.

That’s understandable, but it also represents a misconception of the law. In the UK, when a bankruptcy petition is approved, the Official Receiver- who will be allocated to oversee the distribution of your estate to clear debts- must take into account reasonable living costs. This means any amount you are required to pay in order to clear outstanding accounts after the bankruptcy judgment, will be decided after accommodation, sustenance (i.e. food and drink), travel, and such like has been factored in.

Perhaps putting it simpler, in the Insolvency Service’s own words: “Each case must be considered on its merits, but to maintain consistency it will be necessary for the examiner to discuss with the bankrupt the expenditure information he/she has provided, to ensure that he/she has accounted for all his/her reasonable domestic needs and those of his/her family.

“Case law (such as Re Rayatt [1998] B.P.I.R. 495 and Scott v Davis [2003]BPIR 1009, see paragraph 31.7.18) emphasises that reasonable domestic need is to be determined by reference to the circumstances of each case, which could include in some circumstances provision for dependant children to continue their private education, where it can be shown that it might be detrimental to the children to move them to a different school.”

With this in mind, most instances wherein the bankrupt’s sole income is dependent on benefits will result in no deductions being taken from those benefits in order to pay back creditors. As a general rule of thumb, consider this to be incremental; the more you earn, the less you use benefits, the more likely part of that income will be allocated to clearing the bankruptcy debts. In addition, it’s also important to note that individuals on certain types of benefits will be entitled to a reduction in the costs associated with filing a petition.

Currently, in England and Wales you are required to pay £175 to the court, and £525 Official Receiver’s fees. In some circumstances, there may be an exemption from the latter, leaving just the court costs to pay. Like most things in bankruptcy though, all decisions are judged on individual cases, therefore it’s vital you seek professional advice from a registered debt agency or charity in order to understand your own situation, and the repercussions of any insolvency proceedings that are enacted, voluntarily or involuntarily.