Bankruptcy
Bankruptcy should only be considered once all other solutions for clearing and managing debt have been exhausted. However extensive the level of debt, there have never been more options available for taking control of, and eliminating, personal debt and all of these routes should be explored before considering bankruptcy. This ‘last resort’ in the world of effective debt management can be conducive to achieving a debt-free existence, but not without its own costs.
So What Is Bankruptcy?
Bankruptcy has a legal status, and as such is basically a legal declaration of an individual or an organisation's inability to repay debts owed to creditors. There are two types of bankruptcy:
- Involuntary Bankruptcy: where a creditor files a bankruptcy petition against a business or corporate debtor in an attempt to recoup what they are owed or to instigate a restructuring situation (such as by other company directors or shareholders) so that they are repaid. The amount owed must be a minimum of £750 and an involuntary bankruptcy petition may not be filed against an individual debtor outside of the business remit.
- Voluntary Bankruptcy: this is the more common form of bankruptcy which occurs when an individual or company instigates the action themselves, in acknowledgement that they are insolvent and as such are unable to repay their debts.
The date of a bankruptcy order acts as a benchmark in removing liability for the debts relating to the order. Approximately one year after the date of the order, the bankruptcy will be discharged, which means that credit restrictions placed at the time of the order should be lifted.
How Does Bankruptcy 'Help'?
Although it can be traumatic to acknowledge such a level of insolvency and to go through the bankruptcy process, ultimately a declaration of bankruptcy can help:
- Debtors – by clearing the current debts and enabling a fresh start from scratch, subject to any restrictions imposed in the bankruptcy order.
- Creditors – by allowing all creditors access to some form of repayment from the assets available.
If bankruptcy appears to be the most appropriate solution to debt problems, do seek independent advice before committing to such action, for example from the Citizen’s Advice Bureau or National Debtline, to seek out alternative solutions and to help ensure that you are aware of the implications of the process, and the resulting restrictions, for your future finances.
What Happens?
After either the creditor or debtor initiates the bankruptcy process, the debtor is expected to co-operate fully with all of the bankruptcy proceedings. If the procedure is involuntary, it is worth trying to reach a settlement with the creditor before the end of the process, particularly if you have reason (and evidence) to dispute the action.
Bankruptcy petitions are usually presented at a county court or London’s High Court and can be presented without the debtor being in attendance. The court will appoint an Official Receiver who will investigate the financial affairs relating to the petition.
Again, it is important that advice is sought to ensure that all assets are included and accounted for in relation to the bankruptcy proceedings and to enable full co-operation with the courts.
Once the bankruptcy order is put in place, there will be restrictions placed upon the individual that may affect personal finances and ability to conduct any business for at least a year.
