Bankruptcy Explained

What is bankruptcy?

In the UK, bankruptcy is an option set aside for any individual who finds themselves in a situation where they can no longer pay their debts “as and when they fall due”. The actual Bankruptcy proceeding has two basic aims. The first is to free the individual from the rising pressures coming from the creditors to whom they owe money, thus enabling him or her to make a fresh start. Secondly it ensures all assets, such as property and investments, are evenly distributed amongst the creditors.

So how does it work?

Literally anyone can go bankrupt. An individual can be made bankrupt in one of three ways: voluntarily by the debtor themselves, involuntarily by the creditor to whom money is owed and thirdly by the supervisor or anyone bound by an IVA (Individual Voluntary Arrangement).

It is the Courts themselves who are officially responsible for making a bankruptcy order against an individual, although this is usually done upon the request of the individual himself or one of his/her creditors. Any assets belonging to the bankrupt then fall under the control of a Trustee, either a civil servant or officer of the Court, the Official Receiver, or a licensed Insolvency Practitioner. The appointed then has the responsibility of looking into to every aspect of the debtor's assets in order to establish some form of return to the creditor. As soon as a bankruptcy order has been made against the individual, creditors must cease to pursue payment as this then enters into the hands of the Trustee.

What exactly does bankruptcy imply?There is a whole list of implications which apply to bankruptcy.

Here are the main implications:

  • You lose control of your assets.
  • You cannot obtain credit for over £250 without the permission from the lender.
  • You cannot act as a company director.
  • You cannot take any part in the promotion, formation or management of a limited company (LTD) without the permission of the court.
  • You cannot trade in any business under any other name unless you inform all persons concerned of the bankruptcy.
  • You may not practice as a Charted Accountant / Lawyer.
  • You may not act as a Justice of the peace (JP).
  • You may not become a member of parliament.
  • You may not become a member of the local authority.
  • Your credit is affected for many years after the annulment.
  • You may be publicly examined in court.

It is worth noting too that even when your bankruptcy order has been discharged, you may have what is called a bankruptcy restriction order made against you. This type of order is made when co-operation fails somewhere along the line between the debtor and the Official Receiver, or where debts were taken on in full consciousness of knowing they could not be repaid. Bankruptcy restriction orders can last for up to 15 years and endeavour to make any future financial dealings considerably restricted.

Are there any advantages to bankruptcy?

First and foremost bankruptcy can come as a sudden relief to the individual involved and the immediate worry and stress, that outstanding debts incur, is lifted since you no longer have to deal directly with the creditors. Certain possessions such as household items may be retained along with a reasonable amount of capital on which to live. Automatic discharge is possible after as little as one year after which you can clear the slate and make a fresh start. Any money owed can usually be written off. As for the creditors a bankruptcy order promotes a full detailed investigation to be carried out into the debtor’s affairs. They are no longer permitted to chase their debts directly and must therefore make any claim to the Trustee.

And the disadvantages?

It is important to note that declaring oneself bankrupt can lead to unfavourable long-term implications. Perhaps the main downside is the public humiliation especially if you see your situation published in the local paper. It is not a proud declaration to announce to friends and family either considering all the negative aspects that go hand in hand. Much time is spent going back and forth from meetings with the Official Receiver and all personal affairs are exposed to the Trustee. Any business owned is immediately closed and assets of value such as your home, any life insurance policies or pensions are lost along with any assets acquired during the bankruptcy term itself. All bank accounts and credit card accounts are closed and anything on lease or higher purchase must be returned immediately. Many individuals lose any professional or business status and future employment opportunities may be in jeopardy.

Are there any alternative to bankruptcy?

The answer to this is yes. IVA’s or Individual Voluntary Arrangements can be established. For this the services of a licensed Insolvency Practitioner is required. It is basically a formal yet legally binding arrangement set up between the debtor and the creditor. A repayment scheme based on a lump sum or monthly payment is put into place although an IVA may decide to safeguard your property to secure the arrangement. Establishing informal arrangements with the creditor are possible although this can be a difficult option to arrange. In addition there is the option of a Debt Management Plan that will negotiate on your behalf; however some may charge a fee for their services.

It is highly recommended they you explore all avenues and alleyways before considering bankruptcy as an option or solution for debt management.

Published on September 22, 2007