How bankruptcy works

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How bankruptcy worksThe subject of bankruptcy seems to be a popular and recurring topic in local and national newspapers as well as the media, but for the majority of people bankruptcy is a serious debt solution they would prefer not to contemplate.

Overview

Bankruptcy occurs as a direct consequence of a ‘bankruptcy order’ which is made through the courts against an individual. There are just two ways this can be done:

1. If you are in debt with little money and see no realistic chance of repaying your creditors for several years, you can apply to be made bankrupt.
2. If any of your creditors is owed more than £750, then, without your agreement, they can apply for a bankruptcy order against you.

After a bankruptcy order has been made, you no longer have to deal personally with your creditors – this responsibility passes to the Official Receiver who assumes control of your property and money, selling any asset deemed non-essential and distributing the proceeds to your creditors.

A bankruptcy order is usually in force for twelve months, after which you are ‘discharged’ and free of your original debts – other than fines, student loans, and matrimonial debts which are all unaffected by bankruptcy.

Advantages of a bankruptcy order

There are a number of advantages to the individual who owes the debt by going into bankruptcy:
• You will no longer be pressured by your creditors who must deal directly with the Official Receiver.
• Most types of court actions for debt-recovery are halted by a bankruptcy order.
• You can keep specified items, such as essential domestic equipment and a practical living allowance.
• Once you are discharged, often after twelve months, the slate is clean and you can be debt-free.
• For most types of debt, the money you owe is written off.
• Pensions are not usually affected by bankruptcy.

For many people bankruptcy is the most appropriate debt solution and it offers a fresh start but it is a serious decision to make and should not be taken without due consideration.

Disadvantages of a bankruptcy order

In keeping with most debt solutions, applying for bankruptcy also has its downsides:
• Bankruptcy can cost up to £700 in fees, and considerably more if you have to pay for legal advice.
• Your home could be sold without your permission, though you may become eligible for re-housing.
• Many of your high-value/luxury possessions – for example, your car – could be sold off to meet your debts.
• Your bankruptcy status will bar you from obtaining any further credit during the bankruptcy period.
• You remain liable for some debts, such as fines, student loans, and matrimonial debt.
• Bankruptcy may have implications for your rights under immigration law.
• If you are a business owner, the Official Receiver has authority to wind up your business, make your staff redundant, and sell business assets to meet your debts.
• In certain professions, bankruptcy invalidates your professional status, preventing you from continuing that type of work.
• Your bankruptcy status is publicised. The details are accessible via the Insolvency Register.
• Non-compliance with bankruptcy restrictions can result in further orders against you, severely limiting your financial freedom.

Alternatives to bankruptcy

If you’re wondering whether or not to go bankrupt then you should always seek professional advice before entering into bankruptcy proceedings.

If enough of your creditors give their consent, you can arrange a formal Individual Voluntary Arrangement (IVA) to repay what you owe – those who initially refuse consent are subsequently subject to the arrangement and prevented from pursuing further debt-recovery actions.

A Debt Management Plan, which is more informal, gives a debt management company authority to reach agreement with your creditors and manage the creditor repayments. However, creditors are not bound by such an agreement and are free to re-commence debt-recovery actions if they wish.

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