What is bankruptcy?
Bankruptcy is one of the ways that individuals who can’t pay their debts can get their finances under control and make a fresh start.
Bankruptcy is a procedure governed by the courts that effectively frees you from the burden of your debts, and distributes your assets amongst your creditors. You can choose to become bankrupt, or alternatively your creditors can have you declared bankrupt if you are unable to repay what you owe.
Your financial affairs are taken over by an officially-appointed Trustee who will turn any assets you have into cash and distribute this amongst your creditors. This means that, with some restrictions, you are then able to make a fresh start free from debt.
Who can be made bankrupt?
There are three circumstances where a bankruptcy order can be made.
- You acknowledge that you can’t pay what you owe, and wish to declare yourself bankrupt
- If you owe more than £5,000 your creditors can apply to have you declared bankrupt
- If you’ve entered into an Individual Voluntary Arrangement (IVA) but have broken its terms, then an insolvency practitioner can make you bankrupt
Once you are declared bankrupt, your Trustee will deal with your assets, such as property, bank accounts and other items of value. If you’re self-employed, any business assets you own will be claimed by the Trustee.
If you can afford it, your Trustee may request that you enter an income payment agreement (IPA) in order that you make regular payments towards your debts from your income. If you can’t agree on payment amounts under an IPA, your Trustee can apply for an income payment order (IPO). Payments normally last for three years (longer than the period of bankruptcy itself).
You will be freed from bankruptcy (discharged) after 12 months. This releases you from most of the debts you had when your bankruptcy order was made.
What are the advantages of declaring bankruptcy?
Although it’s a big decision that many people put off longer than they should, once it’s made, your situation should begin to improve. You will be able to free yourself from harassing calls and the actions of your creditors. Your debts will be written off, and you will be allowed to keep certain assets and a reasonable amount of money to live on.
What are the disadvantages of declaring bankruptcy?
Having to admit to being a bankrupt is still be embarrassing, and can feel like an admission of defeat. It will have a number of consequences. You will lose your credit rating and all your credit cards, and you might lose your home, and could find it hard to get a mortgage in the future. If you own a business, it might be closed down and the assets sold off to pay your creditors.
However, going bankrupt can spell the end of a very stressful period of your life and give you the opportunity for a new start.
Whilst individuals go bankrupt, companies or partnerships that are unable to pay their debts are classified as insolvent. For further details see Creditors’ Voluntary Liquidation CVL or Members’ Voluntary Liquidation.
How we can help
It is important to be aware that bankruptcy might not be your only option. At HW Fisher, our highly-experienced team can assess your situation and offer advice on alternative strategies that might be applicable to get your finances back on track. You’ll find us approachable, friendly and above all, understanding of the issues you are facing.