Bankruptcy - what does it really mean?
While most of us have heard of bankruptcy, not many of us have much more than a vague idea of the process. This guide lets you know what bankruptcy means, what it entails and what your options are.
What is bankruptcy?
If you can't pay your debts, then you may be declared bankrupt. In order to be made bankrupt, a court will have to issue an order against you – this can either be done at your own request, or at the request of your creditors or an insolvency practitioner. According to experts, bankruptcy may be a suitable option for someone with considerable debt, no income and no assets. However, if you are struggling with debt, there may be alternatives that could suit your circumstances before you think about bankruptcy.
What does bankruptcy involve?
It is important to note that bankruptcy should be a last resort, as declaring yourself bankrupt has serious financial ramifications, and will significantly impact your ability to obtain financial products in the future. Another consequence is that it can even ruin your career. Solicitors, for example, are not allowed to practice if they have been declared bankrupt. Those who are declared bankrupt may also have to:
- give up most of their assets, salary and any home investments
- close their business if they own one
- sell any shares or property – even if it is jointly owned – to pay back money owed to creditors
- give up any money received during the bankruptcy process, for example lottery winnings or inheritance money.
Declaring yourself bankrupt
Gov.uk has a detailed guide* on what to do if you are considering applying for bankruptcy. The first step is to find the court you need and then apply. You'll have to pay up to £705 in costs and fees, and, once the order is made, your assets will be frozen. After this, you will have to fill in a bankruptcy petition and a statement of affairs listing all your creditors, and then swear an affidavit in court stating all the information is correct. Once this is done, a date will be set for your hearing.
The bankruptcy process
Whether your application is accepted or rejected is decided by the courts. Once a bankruptcy order is made, your accounts will be frozen and your money will come under the control of a court official known as the official receiver. They will interview you about your assets, before informing your creditors of your bankruptcy. Your assets will be sold to pay off the cost of the bankruptcy and any creditors. The official receiver will also inform you when your bankruptcy ends (usually after one year). At this time, most of your debts will have been either paid off by the sale of your assets, or written off – although it's worth noting that some debts may remain. Even though the bankruptcy only lasts a year, a record of it will remain on your credit rating for six years.
Alternatives to bankruptcy
You could try to enter into an informal arrangement with your creditors to pay back the debt. Without a legal undertaking, however, there is a risk that your creditor could ignore this agreement at a later stage.
If you have a regular income, your debts are under £5,000, and if you have at least two debts, one of which is a high court or a county court judgement, you can apply for an administration order*. This will help you to pay back your creditors by taking regular, set payments from your monthly income and passing them on appropriately. Although the order is a free service, the court will charge you an administration fee (no more than 10 percent of your debt).
If your debt problem is severe, you can still avoid bankruptcy by applying for an Individual Voluntary Arrangement (IVA)*. This is similar to an informal arrangement but it has more structure and there are fees involved. It gives you more control over the process, it usually lasts around five years, and you won't be declared bankrupt for credit purposes. It's important to note, though, that if you default on any of your payments there is a possibility that you will be made bankrupt.
Although the alternatives to bankruptcy may seem more attractive, remember that any formal arrangement is still a serious matter and should be avoided if possible.
Organising your finances
Possibly the best alternative to bankruptcy is prevention, so it might be worth trying to manage problems before they build up.
- Check what's coming in and what's going out. Keeping an eye on your income and outgoings could help you to spot any issues early on.
- Compare your spending with your income and note the amount left over, or if there is a shortfall.
- Start a filing system for your financial information and draw up a budget for your monthly finances.
- Review your accounts: make a list of your accounts, your mortgage, pension and savings. How much does each cost you every month? Are they still working for you? If your circumstances have changed, it might save you money to change your accounts. If you opened a savings account when you were a student, for example, the same account might not be appropriate for you now.
- If you are worried about your debt levels, seek help sooner rather than later. See below for a list of useful links.
These details are provided for information purposes only and it's important to seek specialist advice before making a decision.
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* Contains public sector information licensed under the Open Government Licence v3.0.