What is bankruptcy?If you are seriously struggling to pay back existing debts you have and are getting very behind on mortgage or credit card repayments, or a payday loan, a way in which you can solve this debt problem is applying for bankruptcy. However, it is not only you who can apply for bankruptcy. Creditors (the people who you owe money to) can also apply to make you bankrupt, and this isn’t something you can stop creditors doing. However, there is a minimum level of debt that has to have been reached in order for a creditor to be able to make you bankrupt. In the UK, this is usually at least £5000 that is owed to a lender, or it can be different lenders. If you find a creditor makes you bankrupt, you have no choice but to co-operate with these bankruptcy proceedings, even if you dispute the claims. It is much better to try and reach some sort of settlement prior to the creditor’s petition is heard in the court, as it can be a far less expensive option. If you do go bankrupt, all your non-essential assets are used to pay off the debt you owe. Non-essential assets include possessions and property, as well as any additional income that you have.
How long does bankruptcy last?Generally speaking, bankruptcy is a legal status that can last for up to a year. Once you have come to the end of this period, any debts that still exist will usually be cancelled, meaning that the debt has been cleared.
How do you become bankrupt?A ‘bankruptcy petition’ must be made by a creditor, a debtor, a person in receipt of an IVA (individual voluntary agreement) and presented to the High Court. Once this petition has been accepted, the Court will then provide a ‘bankruptcy order’, and after you have received this order, it means you have become officially bankrupt.
What are the advantages of bankruptcy?Whilst being in a situation of having to decide whether or not to go bankrupt is hardly something most people would be happy about, it can sometimes be the right option for you. For example:
- Once a bankruptcy order has been filed, it prevents creditors trying to take additional court action against you to get further money back
- You can keep certain things and will have a reasonable income
- It can provide a fresh start
- It lasts for a fairly short period of time of just a year
- You won’t have to deal directly with creditors, which can alleviate some stress
What are the disadvantages of bankruptcy?It is important to remember that the option of bankruptcy is not the best option for everyone struggling with mounting debt. There are alternatives, such as getting a debt relief order – this may be a better option for you if your income is particularly low.
- The upfront costs of going bankrupt are expensive. To make an application for bankruptcy, you will first need to pay a fee of £680
- You may have to sell your home
- You may have to sell precious possessions
- Bankruptcy can severely affect your credit score and will be on your record for at least six years
- Applications for credit of any kind may have a greater chance of being declined
- If you have a higher income, you may be asked to make debt repayments lasting for three years, rather than just one
- You may lose accumulated pension savings if at the time of bankruptcy you are at the pension age
- You could lose your job – some professions will fire people who have been made bankrupt
- If you are self-employed and own a company, this may be closed down, with any assets sold off
- Bankruptcy has the potential to affect your immigration status
- Any bankruptcy orders are made public, meaning you have very little privacy
- Not all debts are written off: for example, student loans or court fines are not exempt at the end of the bankruptcy period