What is Bankruptcy?
Bankruptcy is often considered the last resort for people struggling with debt because there are other debt solutions to consider first. It is a legal declaration for people who cannot afford to pay their creditors. A state of Bankruptcy can be declared by creditors in an effort to reclaim in part money that is owed to them. A majority of Bankruptcy cases are initiated by the individuals who feel they cannot pay their debts.
Bankruptcy can occur when an individual’s debts are greater than his or her assets. Declaring bankruptcy means an individual is financially insolvent and can be relieved of outstanding debts. It is often considered as a last resort for people with serious and ongoing debt problems.
The bankruptcy proceeding has two aims:
To free the individual from the pressures of creditors (people they owe money to) and to enable him or her to make a fresh start.
To ensure that all assets (such as property and investments) are distributed fairly among the creditors.
The Courts are officially responsible for making a bankruptcy order against an individual, although this is done at the request of either the individual or one of his/her creditors.
The assets of the bankrupt individual then fall under the control of a trustee. This will be either the Official Receiver (a civil servant and officer of the Court), or a licensed Insolvency Practitioner. Whoever is appointed becomes responsible for uncovering as much as possible about the debtors assets and liabilities and then maximising returns for the creditors from the assets available, within certain guidelines.
Once a bankruptcy order has been made against you your creditors can no longer pursue you for payment. Payment becomes the responsibility of the Trustee.
What are the disadvantages of bankruptcy?
No more credit
Whilst you are bankrupt, you can’t apply for more credit.
If you own your own home, it might have to be sold (but you may be able to apply to your local authority for re-housing).
Some of your possessions might have to be sold, for example, you will usually lose your car and any luxury items you own.
Some professions don’t let people who have been made bankrupt carry on working.
If you own a business, it is more than likely that the Official Receiver will close down your business, dismiss your employees and sell off the assets.
Going bankrupt can affect your immigration status.
Bankruptcy restriction order
Even when you are no longer bankrupt you could have another order, called a bankruptcy restriction order, made against you.
These orders can be made, for example, where you did not co-operate with the Official Receiver, or you took on debts knowing that you had no hope of paying them back.
They can last for 15 years and will make your financial affairs very restricted.
Even when you are no longer bankrupt there are some debts such as court fines and student loans that will never be written off.
You cannot keep your bankruptcy private. All people subject to bankruptcy in the UK have their name advertised in two local newspapers and the London Gazette.
You can be publicly examined in court.
Your credit rating will be damaged for a long time, up to 6 years.
Bankruptcy is a severe consequence of debt and shouldn’t be entered into lightly. However, for some people bankruptcy may be the only solution.