Bankruptcy

When an individual has more debts than they can realistically pay, they may consider bankruptcy. Bankruptcy used to be the only option when a person became unable to service debts but it has recently been pushed out of favour by the arrival of IVA’s or Individual Voluntary Arrangements. Bankruptcy has a bad stigma attached to it and is a lot more serious than an IVA. When going bankrupt you will usually lose your assets and property in the process whereas with an Individual Voluntary Agreement you get to keep them.

Bankruptcy used to last for 6 years but the law has now changed and a first time bankrupt will usually be discharged within 12 months. It will be publicly advertised that you are going bankrupt to allow anyone with any claim on your assets to come forward.

If you are faced with the prospect of bankruptcy then it is advisable to see if you qualify for an IVA instead as this is a lot more forgiving in nature.

How does bankruptcy work?

The goal of bankruptcy is to:

• Make sure that you are free from debts that you cannot repay, allowing you to make a fresh start (subject to some stringent restrictions)
• Ensure that your assets are divided up equally amongst the people you owe money to

How can you be made bankrupt?

There are three ways in which you can be made bankrupt:

• Voluntary Bankruptcy – This is done by yourself
• Involuntary Bankruptcy – By the creditor you owe money to as long as the amount you owe is over £750
• Supervisory Bankruptcy – By the supervisor or anyone bound by an IVA

If bankruptcy proceedings are started against you, you cannot ignore them. If you choose to bury your head in the sand and pretend that it isn’t happening the bankruptcy order can still be made. If you feel that you do not owe a creditor who is applying to make you bankrupt or if you feel that you do not owe the full amount, you can try and reach a settlement before the bankruptcy petition is due to be heard in court.

What does bankruptcy mean for me?

There are many implications of bankruptcy, a lot of which are very limiting:

• Any assets you own are no longer yours, they are taken and divided up equally amongst your creditors. This means that your home, car, money in bank accounts etc is now gone.
• You cannot apply for credit over £250 without express permission from the lender.
• You may no longer act as the director of a company
• If you wish to be involved in a limited company in any way whatsoever you will have to get written permission to do so from the courts.
• You can not practice as a Chartered Accountant or Lawyer.
• You can no longer apply to become a member of parliament.
• Your credit will be affected for many years after the bankruptcy

For anyone facing the possibility of bankruptcy it is advisable that you try and seek out other alternatives such as the aforementioned Individual Voluntary Agreement. You can read all about IVA’s here.