Bankruptcy is an issue few wish to discuss. A dirty word, almost. Sadly right now it is a topic that is very much in vogue. Many are struggling financially right now, for obvious reasons. And for many, the best option may well be to enter into bankruptcy. We took a look at what is involved – this is bankruptcy explained.
Bankruptcy is a legal status involving a person or business that possesses debts they cannot repay. Usually, the debtor files for bankruptcy. For those that owe more than £5000 a creditor can apply to make you bankrupt without your say-so.
The initial step will see a debtor’s assets listed, valued and assessed so an idea can be got of worth. These assets are a potential method of paying off outstanding debts.
A bankrupt is restricted in what they can do financially until they are free of the process. Once it is discharged, more normality returns. The restrictions may hurt you, but bankruptcy allows those overwhelmed with debt to make a fresh start in life. Despite the stigma attached it can give them a sense of freedom. Because at last something has been done about their financial problems.
Processes vary across the UK. Check with your local Citizen’s Advice Bureau for details.
Although the prospect of going bankrupt might sound like the last thing you would ever wish to contemplate, there are clear advantages. Firstly, once the process is complete, and you are discharged, you can get on with your life. Often this can be as soon as just a year after you file. By declaring bankruptcy, you no longer have to deal with those you owe money to. The creditors have to deal with receivers instead. You do not lose everything you have, and can retain certain assets, such as household goods, and enough money to be able to live. Renters should not be forced to move, unless they encounter a particularly unhelpful landlord. In short, it can help remove a lot of the immediate stress you were under.
It will not surprise you to learn there are plenty of disadvantages to declaring bankruptcy. Firstly, do not assume it is free – it is not! Which may seem harsh for people that are already struggling to get by, and cannot pay debts. But despite that, it costs £680 to initiate the process. If you still have funds, you will be expected to pay off debts for three years. Debts are not just automatically wiped by going into this process. You will struggle to get new credit for many years, as your credit report will show the process for six years. This seriously hampers your financial options for quite a while.
Homeowners may have to sell their home, although local authorities may source new accommodation. Debtors may have to sell other possessions, such as cars and luxury items. Items of value will help pay off creditors. Pension savings may be lost, and jobs in certain professions may be at risk. Business owners may struggle to keep them going, and the bankruptcy will be public knowledge for those that wish to look. This alone puts many off, the feeling of shame.
It’s a big step.
Bankruptcy is perhaps the best option for you if you see no way to pay off debts, have little of value or much equity in a home. Or if you rent. If you see no prospect of your situation improving, then it may be something to consider. There’s no minimum level of debt required for you declare bankruptcy. Debt must just exceed value of assets.
Bankruptcy may not suit if your debt is under £20,000 and you have few assets. Likewise, if it may lose you your employment, it could do more harm than good. Also, if you feel circumstances may change for the better soon, it may be worth holding fire for now. Always seek financial advice from experts if not sure what to do.
Not all debts are included in bankruptcy proceedings. Thus, these debts will still need to be paid off, so this is something else to consider. Here is a list of such debts.