The main reason that many debt counsellors
will advise you to think seriously about using bankruptcy as a debt management solution is the fact that you may lose any ‘saleable’ assets that you own. These will usually be cashed in to pay back some of what you owe. This solution can see you completely free and clear of your debts in just a year or so but it does come with a cost.
You may already know, for example, that there is a very real chance here that you will lose your home, cars and any items of value that can be sold to raise cash. In some cases you may even lose your job. But, you have broader issues to think about here that many people simply don’t realise will be involved. So, could you also lose your pension fund and any life insurance policies that can be surrendered for cash value?
Will you lose your pension?
Will you lose your life insurance policies?
- If you declare yourself bankrupt (or are declared bankrupt by creditor action) then your pension may be viewed as an asset that can be liquidated to help go towards repaying your debts. This only applies, however, if you have declared yourself bankrupt before 29th May 2000.
If you have declared yourself bankrupt after this date then your pension should be safe. This will, however, only apply if your personal pension scheme has been given approval by HM Revenue and Customs. These pensions are not viewed as being part of your assets or estate. State pensions are also given the same protection here.
If your pension hasn’t been approved then you can still try and hang on to it. To do this you will need to talk to the Trustee handling your estate to try and make a Qualifying Agreement or you will need to go to court for an Exclusion Order. If this fails then your pension fund may well be liquidated.
- If you hold one or more life insurance policies that have a value that can be surrendered for cash then you may well lose them during the bankruptcy process. The Trustee in charge of your bankruptcy has the right to cash them in and use their surrender value to put towards repaying some of your debts. These policies are viewed as assets in many cases and form part of your estate.
If you hold a joint policy (i.e. with your spouse or partner) then they need to talk to your Trustee about their part of the policy. It may well be possible to ring-fence this if they are not liable for your debts so that they do not suffer during your bankruptcy process.
It is important to make sure that you talk to your Trustee if you have a personal pension or life insurance policy that may be considered to be an asset here. There are clearly defined rules about what the Trustee can and cannot do with these items and, in most cases, you will find that your pension should be safe. You may well, however, have to resign yourself to losing life insurance policies if they have a surrender value.