What is Bankruptcy?
Bankruptcy is a form of insolvency that writes off debts if you can’t afford to repay them, giving you a fresh start. It’s a legal process that’s suitable if you have little hope of repaying your debts in a reasonable amount of time.
When you make yourself bankrupt, nearly all your unsecured debts are written off, which lets you make a fresh start. In some cases, your creditors can choose to make you bankrupt. However, bankruptcy has serious implications and shouldn’t be undertaken lightly.
It’s best suited for people who can’t afford to pay their debts off within a reasonable timeframe. That means, if you owe a lot more than your existing income and any assets you own, it may be a suitable solution for you.
Once you have declared bankruptcy or have been made bankrupt, you will be under no obligation to respond to your creditors. People you owe money to will not be able to take court action against you, and neither will you be required to respond to their phone calls or letters.
Although bankruptcy can mean you clear your debts in typically 12 months, that doesn’t mean it’s suitable for everyone.
Like all other debt relief solutions in the UK, bankruptcy has its risks and benefits. Initiating the legal process of declaring bankruptcy may be like a fresh start for some. For others, it could have serious social and financial implications.
Debts Excluded from Bankruptcy
Child Maintenance Arrears (if set by CSA or Child Maintenance Service)
Criminal Fines
Debts you obtain after the date of your bankruptcy order
Debts taken out fraudulently (e-g benefits fraud)
Mortgages (if you want to keep the house)
Social Fund Loans
Student Loans
TV License Arrears
Court Orders telling you to pay compensation for someone’s injury
Payments ordered by the court as part of family proceedings (e-g in divorce cases)
Here are some of the advantages of going bankrupt:
Your unsecured debts will be written off, giving you a fresh start.
Your creditors can’t take any further legal action against you to recover your debts.
They must also stop demanding payment, charging interest and adding other charges.
You won’t receive any further contact from your creditors.
Debts Included in a Bankruptcy
Some debts that are included in a bankruptcy and written off by the end of it are:
- Credit Cards
- Utility Arrears
- Store Cards
- Overdrafts
- Catalog
- Benefit Overpayments (If not fraudulent)
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.
Is Bankruptcy right for me?
The bankruptcy will appear on your credit file for 6 years. You may have to sell some of your assets and pay the money into your bankruptcy. It can include your home, your car and other high value items. Details of your bankruptcy will be published on the Individual Insolvency Register. If you can afford to do so, you may have to make payments to creditors for up to three years. There are some debts such as court fines and student loans that will not be written off. Going bankrupt can affect your immigration status. 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. You may not be able to do certain jobs if you’ve been bankrupt. These include being a solicitor, an accountant and some other jobs where you’re a member of a professional body.
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.