Dealing with Debt - Bankruptcy

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Bankruptcy

Warning, if you consider entering a bankruptcy petition we suggest that you seek advice

What is bankruptcy

Bankruptcy is where the court appoints someone to take over the management of a person's financial affairs for the benefit of her/his creditors. The person appointed is called a trustee. The trustee will take control of the person's income and assets and use the available money to pay the creditors.

What one needs to know about bankruptcy

Bankruptcy is likely to be the preferred option where one has:-

Several debts; and
No assets; and
A low income; and
Little or no prospect of the situation improving.

The main points for a person to know when considering bankruptcy are:-

A creditor can make a person bankrupt if that person owes the creditor £750 or more, or she or he can apply to make her/himself bankrupt.
Once a bankruptcy order is made, the debtor no longer has to deal directly with creditors. The debts are dealt with by a third party called a trustee.
Most bankruptcies are automatically discharged after one year. This period can be extended by the court.
The court may make a bankruptcy restrictions order which extends the effects of bankruptcy.
Most debts still outstanding at discharge will be written off but some debts will still be payable after the end of the bankruptcy period.
If the person is an owner-occupier, the home may be sold to pay the creditors.
Costs and fees are payable by the client (currently £345 + £150).
Bankruptcy will affect the client's credit rating.
The bankruptcy is advertised in the local press.
One can be disqualified from holding certain posts and offices and will not be allowed to practice certain professions.

When is it appropriate for a debtor to apply for bankruptcy.

Warning!!! Bankruptcy can be complicated and may involve criminal liability. A decision about whether or not to go bankrupt should not be taken lightly. A debtor may have other options and the adviser should follow the debt advice process to ensure that bankruptcy is really the best option in an individual case. If in doubt, the debtor should be referred to an experienced money adviser.

Bankruptcy can be a good option for a debtor if s/he:-

faces a substantial debt problem; and
has no assets or little equity in her/his home; and
has a low income and limited ability to pay her/his debts; and
has no need for credit in the medium term; and
it is unlikely that her/his situation will change.

Bankruptcy may be unhelpful if the debtor is attracted by the advantages of bankruptcy without fully considering the disadvantages of the bankruptcy procedure. The debtor should also consider how employment, business and family members may be detrimentally affected.

If the debtor decides that the best option is to become bankrupt, s/he also has to decide whether to make her/himself bankrupt or whether to wait for the creditors to do this after having fully considered the advantages and disadvantages of bankruptcy.

The debtor may choose to wait for the creditors to make her/him bankrupt. This will save her/him the cost of issuing the petition. However, the creditors may decide not to issue a petition for bankruptcy but to use other methods of enforcement.

Advantages of bankruptcy

The advantages of becoming bankrupt include the following:-

the bankruptcy process removes uncertainty and anxiety
bankruptcy can help the debtor make a fresh start - most debtors are automatically discharged from bankruptcy after one year
creditors are forced to recognise that the debtor cannot afford to pay the whole of the debt, contact with the debtor will stop and most creditors will be unable to take further action against the debtor
if the debtor is able to make any repayments, they will take the form of single payments to the trustee rather than payments to individual creditors. A debtor on a low income and with no assets of value will not have to make any payments at all
after the bankruptcy is discharged, most debts incurred before the bankruptcy order will be written. However, some debts will still be payable.
while the bankrupt will no longer have control of her/his assets, s/he will be allowed to keep certain assets, including household items necessary to 'satisfy the basic domestic needs of her/him and the family'
the debtor will usually be free to follow her/his trade or profession but there are exceptions.

Disadvantages of bankruptcy

The disadvantages of becoming bankrupt include the following:-

loss of freedom in financial affairs. The bankrupt will be subject to the control of the trustee and will have to make full disclosure to the trustee
if the debtors owns or jointly owns her/his own home or has a beneficial interest in it, s/he risks losing her/his home
if the debtor is a tenant, her/his tenancy may come to an end if there is a clause in the tenancy agreement that prohibits a bankrupt person from being a tenant. If the debtor has rent arrears, the home may also be at risk
loss of other assets. The debtor risks the loss of assets of value, if any, except those necessary to satisfy domestic needs, tools of the trade, and vehicles needed in the course of employment or to care for a dependant
gas, electricity and telephone contracts may need to be put in to the name of another adult who lives with the bankrupt debtor. If there is no other adult, the bankrupt may have to change to a prepayment system, pay a deposit, obtain a guarantor or lose the service
loss of bank account. The bankrupt will normally lose the use of her/his bank account and will have to open a basic account with no overdraft facility
the bankrupt cannot hold certain public offices or work in certain professions until discharged from bankruptcy. For example, s/he cannot act as a director of a company or serve as a trustee of a charity
the bankrupt's access to credit will be severely restricted until discharge. Even after discharge, the bankrupt may still have difficulty obtaining credit and may have to pay higher rates of interest until s/he has re-established a good credit rating
bankruptcy publicity and effect on reputation. It is possible that the bankrupt's employer, friends and neighbours may find out about the bankruptcy as it will be publicised in the national and local press and will be available to anyone who wants to request information. A public record will be kept in the Individual Insolvency Register
some debts will still be payable at the end of the bankruptcy period. These include mortgages and other secured debts, magistrates' court fines, debts payable after personal injury claims, and debts to the Student Loans Company. Although most enforcement action has to stop following a bankruptcy order, in some cases the bailiffs may still be able to seize goods
the costs and fees of becoming bankrupt. The debtor will have to pay a fee to petition for her/his own bankruptcy, unless s/he is entitled to exemption or remission of court fees. S/he will also have to pay a deposit if s/he is the petitioner. Other costs will be met from her/his assets, if any, after the bankruptcy order is made
the bankrupt may become the subject of a bankruptcy restrictions order. A determination by the court that the bankrupt has acted dishonestly or recklessly can lead to restrictions which continue after discharge from bankruptcy.