Article by Sam Griffin - 11th December 2019

The Price Of Bankruptcy

Katie Price, the former glamour model turned anti-bullying advocate, was ordered into bankruptcy on 26 November 2019 by the High Court. There may never be a ‘best time’ to enter bankruptcy, but the run-up to Christmas might be the worst.

Price was already insolvent, following an Individual Voluntary Arrangement in 2018, which had her paying a heavy £2,500 per month to HMRC. Surrounding debts totalling £800,000 are owed to creditors, not including the £2 million cost of legal battles with ex-husband Peter Andre.

With a once towering reported net worth of £45 million, money troubles have festered under Price’s prosperous veneer for a while, with £25,000 per year lining the pockets of plastic surgeons. Perhaps the inevitable has happened. The chickens have flown their jewel-encrusted private jet home to roost.

What is bankruptcy?

Bankruptcy is a legal process and type of insolvency, which provides relief to those with vast debts. It’s the most severe type of insolvency in the UK and usually only undertaken as a last resort. The other insolvencies are Individual Voluntary Arrangements (which Price had prior to her bankruptcy) and Debt Relief Orders.

When a bankruptcy starts, an Insolvency Practitioner agrees a realistic sum with your creditors - this arranged amount will need to be repaid within a year to clear your debts. Afterwards you should be – in theory – debt free.

The Official Receiver takes over your finances to ensure the agreed payments are made on time every month by selling your possessions, vehicle, or home while also using any savings or pension you may have available.

Can someone else make me bankrupt?

Aside from the massive wealth Price once held, what makes this story different to regular cases of bankruptcy is that she didn’t apply for this herself. Most bankruptcies are undertaken by individuals with no other way out of debt – compulsory bankruptcy, especially of someone with such high profile, is rare.

While an individual can apply to make themselves bankrupt, a creditor can make an individual bankrupt by taking court action. This happened to Katie Price after she broke the terms of her IVA. What were the terms of the IVA? To repay £2,500 per month (an amount only slightly more than her estimated plastic surgery budget).

While compulsory bankruptcies are rarer than voluntary ones, they certainly still affect people. Creditors can’t just make someone bankrupt with the click of their fingers though, so don’t fret. There are some specific criteria that need to be met before a creditor can make someone bankrupt.

First, a minimum of £5,000 needs to be owed.

Second, creditors must have attempted court action to reclaim the funds – usually by County Court Judgment. Serious attempts to enter the home and take property must have been made.

Third, the creditors must petition for bankruptcy. You can apply to oppose the bankruptcy order if it reaches this stage.

Fourth, the bankruptcy court hearing must be completed. At this stage, the judge can dismiss the petition, suspend proceedings for another time, or go ahead and make the bankruptcy order.

If the bankruptcy order is made, the Official Receiver will take control of your property and finances to ensure the repayments can be made. Not cooperating with the Official Receiver is a criminal offence. If it reaches this stage, you’re in the same boat as Katie Price, whether you like it or not.

What are the benefits of bankruptcy?

The primary benefit of bankruptcy is to ease the pressure of overwhelming debt. Most debts will be covered by the Official Receiver liquidising and redistributing your assets to your creditors. Once completed (usually within one year) you will be debt free, save for some exceptions like student finance repayments, child maintenance, and Magistrate Court fines. Note that ‘debt free’ is not ‘scot free’ – as having gone bankrupt will still haunt you for years – more on than later.

As Katie Price said herself following the hearing, ‘I [...] can’t wait. I’m better off. I know I shouldn’t say it. It’s good for me. It’s better than paying two-and-a-half grand a month to the […] HMRC. I’m not worried.’

While not a definite rule of thumb, as it depends on your own financial status, a silver lining to the grey cloud of bankruptcy is that home repossession may be delayed if you have dependants residing there, giving you time to find a new home. Tools for work and even a vehicle may be kept, if you can prove they’re necessary for your continued employment.

What are the downsides of a bankruptcy?

The downsides of bankruptcy are stark and far-reaching, so it shouldn’t be considered lightly.

The main thing people worry about with bankruptcies is whether their house will be repossessed. While it isn’t guaranteed, there is certainly the potential for your home to be taken and sold to cover the cost of your monthly bankruptcy payments. Whether or not it falls to this depends on the amount owed and the equity of your home.

It’s not just the house itself that’s at risk, but also the stuff inside. Any non-essential possessions that can fetch a reasonable price will be sold, with proceeds heading straight to the creditors.

One of the often-overlooked negatives is that bankruptcies (and the Insolvency Register in general) have publicly accessible records. This isn’t just about social embarrassment, which may or may not bother you, but more importantly it means any potential landlord or employer will be able to see your bankruptcy. You can be certain that any landlord or employer will have concerns when assessing your application if a bankruptcy is flagged up. Some employers, especially those in fields related to financial matters, will have little choice but to decline the application based on the bankruptcy alone.

Additionally, your Credit Report will be severely damaged, making getting accepted for credit – especially mortgages – incredibly difficult. Lenders actively look for the lowest risk customers and a bankruptcy is perhaps the most serious, high-risk marker you can get.

Regardless of whether you successfully complete the bankruptcy in a year, the entry on your Credit Report will stay for a full six years, damaging your overall creditworthiness the entire time. The bankruptcy entry will only stop hurting your Credit Score once it drops off your Credit Report.

How do I check if a bankruptcy is listed against me?

Checking your Credit Report is the only way to see what bankruptcy information a potential lender, landlord, or employer will see when performing a credit check on you. The Court Records section will hold County Court Judgment entries as well as Insolvencies, including bankruptcies.

If you’re wondering what court information is sticking out on your Credit Report, or if you’re just curious about your Credit Rating, you can check your Multi Agency Credit Report with checkmyfile. It’s free for 30 days, then just £14.99 per month, which you can cancel quickly and easily online at any time.

Our Multi Agency Credit Reports are the most detailed in the UK, having complete information from all four Credit Reference Agencies together, so you know you’re seeing everything.

As for Katie Price, here’s hoping they let bankrupts back into the jungle.

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