Bankruptcy is a financial resolution that may be considered by someone who can no longer afford to pay their debts. It is usually considered the ‘last option’ for people who have accrued a large amount of debt and cannot afford the repayments.
Once you have been declared bankrupt, your remaining debts are written off, however you should consider this option very carefully, weighing up the pro’s and con’s of other debt solutions that may be available to you.
A period of bankruptcy usually lasts for one year, although in some cases this is reduced.
There are three common ways an individual can be made bankrupt:
- Voluntary – The individual themselves files for bankruptcy
- Involuntary – Bankruptcy order filed by the a creditor who is owed £750 or more
- Should you fail to make the repayments whilst under an IVA (Individual Voluntary Arrangement)
A bankruptcy order can still be made even if you do not respond or refuse to agree to the terms. If you dispute a bankruptcy claim by your creditor, you should try and reach an agreement before the bankruptcy petition is due to be heard. Trying to reach a settlement after this time could prove both time-consuming and costly.
Bankruptcy has a number of implications for your future finances as well as your assets so before you consider bankruptcy as an option to help you solve your debt problems, you should look at alternatives such as an Individual Voluntary Arrangement (IVA).
Implications of bankruptcy include:
- You will lose control of your assets
- You will be unable to obtain credit over £250 without permission from the lender
- You will not be able to act as director of a company for the duration of the bankruptcy
- You cannot take part in the formation of management of a Limited (Ltd) company without the explicit permission of the courts
- You cannot trade under a different name unless you inform all parties concerned of the bankruptcy
- You cannot practice as a Chartered Accountant or Lawyer
- You may not act as a Justice of the Peace (JP), become a member of Parliament or a Local Authority
- Your credit rating and ability to gain credit will be severely affected even after the bankruptcy order is annulled and you may be publically examined in court.
- The bankruptcy will remain on the debtor’s credit report for a period of 10 years
Advantages of Bankruptcy
Although bankruptcy receives a lot of bad publicity, it may be a viable option if you owe a lot of money (typically over £25,000) and cannot afford the repayments.
Bankruptcy has two main advantages – both for the individual concerned and the creditors.
- For the individual, bankruptcy can provide relative peace of mind, outstanding debts are written off and the order is usually annulled in one year (sometimes less)
- For creditors, bankruptcy allows for a full investigation of the debtor’s financial affairs
It is not a question of strict law and regulation. There are no legal provisions which state that bankrupts should be denied, or at least find it more difficult, to get credit.
This is not to say you cannot get credit. It is a myth that bankrupts cannot get credit cards, bank accounts or loans, they can. But the terms on which they get them are severe.
The factors outlined here apply to both voluntary and involuntary arrangements. However, it is generally accepted that the implications for forced bankruptcy may be worse.
So, when considering bankruptcy, make sure your thinking goes beyond the immediate and legal implications. As stated earlier, bankruptcy can give you a reputation not unlike that of having a criminal record and a series of social and financial assumptions will be made, regardless of the actual facts of the case. You will rarely be given the chance to put the situation in its proper context.
This should not be taken to imply that you reject bankruptcy as a strategy – but it must be a carefully considered one.