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FAQ: Can I Eliminate all Debts With Bankruptcy

By: Garry Crystal - Updated: 8 May 2017 | comments*Discuss
Bankruptcy Bankrupt Eliminate All Debts

Bankruptcy no longer carries the same stigma as it once did and many people are using bankruptcy as a debt solution. But there are some debts that cannot be cleared the bankruptcy process.

What Exactly is Bankruptcy?

Bankruptcy is a process that allows debtors to eliminate their debts if they meet the required legal stipulations. Bankruptcy is a chance to make a fresh start free from creditors, and most debtors who choose this option can be debt free in around a year. Although bankruptcy may seem like an easy way to eliminate all debts there are downsides. Bankruptcy may forbid debtors from running a business or from obtaining credit over £500. Although bankruptcy stigma has all but vanished, bankruptcy details will be published in the London Gazette for all to see.

What Debts Will Be Cleared With Bankruptcy?

A majority of debts can be cleared by using the bankruptcy process. All unsecured debts can be cleared including credit cards and loans. In addition, debts such as overdrafts, higher purchase goods, store cards, overdue utility bills and payments to home shopping catalogues can be included. If the bankruptcy is approved then it does mean that creditors can no longer harass or pursue debtors for payments on these debts.

Can I Eliminate All Debts With Bankruptcy?

A common misperception is that bankruptcy will completely clear all debts. This will not be the case and there are certain debts that are not eligible to be cleared through bankruptcy. One of the major debts that cannot be cleared is a mortgage and overdue payments to mortgages. Student loans are another debt that cannot be cleared using the bankruptcy process.

Is Child Support Maintenance Included in Bankruptcy?

Overdue child support payments are not generally included in the bankruptcy process. But child support maintenance is a complex issue when it comes to bankruptcy. It may be the case that after the bankruptcy has been approved the bankrupt’s income may be significantly reduced, if for example they ran a business. This may affect the ability to pay child support payments during the bankruptcy period and an assessment will be required. An insolvency practitioner or bankruptcy trustee will be able to advise on this complex legal area.

Can I Clear My Income Tax Arrears Through Bankruptcy?

Tax is another complicated issue but income tax arrears are usually included in the bankruptcy process. Income tax due up to and including the tax year of bankruptcy will be paid by the trustee and the debtor is not personally liable. The trustee will try to pay arrears from money that he can raise, this may include selling the debtor’s home. Debtors who are in the bankruptcy process should have a Nil tax code for the remainder of the tax year in which they were made bankrupt. If this does not happen then the trustee or the tax office should be informed.

What Happens if I Change Employers During Bankruptcy?

One of the problems of changing employers during bankruptcy is that the income tax rule will change. If the bankrupt does change employers then they will begin to pay income tax again for the remainder of that year. This tax will be deducted from the employee’s salary on an emergency basis. Certain employers will have a bankruptcy disclosure question on their application forms. Although bankrupts do not need to inform present or potential employers they should not lie when asked this question.

Will Income Tax Arrears Be Cleared if Self-Employed?

Most self employed workers will be exempt but there are exceptions. Self employed workers in the construction industry are taxed differently and usually have their tax paid at an 18% fee rate. This flat fee tax will still apply and will be taken off once the bankruptcy process begins. This tax, up until the end of the financial year, will be paid directly from the trustee to the revenues department.

What Other Debts Are Excluded from the Bankruptcy Process?

If the person applying for bankruptcy has a personal injury claim made against them this cannot be included in the bankruptcy process. In some cases bankrupts may also be liable for council tax for the remainder of the current financial year. But if the debtor has received a final demand on their council tax or a liability order then it can be included in the bankruptcy process.

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