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A Look At Bankruptcy

It’s a word few of us dare speak. It conjures images and situations we think we could never find ourselves in. However, for many thousands in the UK each year, bankruptcy is the reality of their lives, and often the best path for them to take after encountering financial difficulties. With this in mind, Moolr have taken a look at bankruptcy.

What is Bankruptcy?

In simple terms, bankruptcy is a legal status involving a person or business that cannot repay their debts. Usually, the debtor files for bankruptcy, but if you owe more than £5000 a creditor can apply to make you bankrupt. Once you’ve been made bankrupt, your assets are detailed and valued and may be used towards repaying your debt.

There are restrictions on your financial behaviour while you’re bankrupt, but once the bankruptcy has been discharged, these restrictions are usually removed, with any outstanding debt written off.

Bankruptcy presents you a chance to start again without the burden of debt. It also offers creditors the opportunity to recoup some of what they’re owed. But rarely all of what they are owed.

Procedures differ slightly across the UK – this article will focus more on what happens in England.

The Advantages of Filing for Bankruptcy

Although the prospect of going bankrupt might sound scary, there are a number of benefits. It is a big step to take, but for some it is the best step to take.
Firstly, once the bankruptcy is completed, you can have a fresh start, in as little time as a year, with debts usually written off. You will not have to deal with creditors anymore, which will remove a ton of stress. You can retain certain items that are important to your quality of life, such as many household items, and must be allowed a level of money with which to live. If you rent you won;t be forced to move, unless your agreement specifies bankruptcies, and any pending court cases may be avoided. In short, bankruptcy could remove a lot of stress from your life.

The Disadvantages of Filing for Bankruptcy

Of course bankruptcy is not a thing to embrace, and is a last resource. It comes with many disadvantages as you will probably be aware. Disadvantages that will greatly affect your life for years to come. Bankruptcy isn’t for anyone and it comes with its fair share of downsides.
Firstly, it is not free to go bankrupt. It costs £680 to start the process, money you may not have if you’re massively in debt. And people who declare bankruptcy tend to be massively in debt.
Secondly, if you earn a certain amount, you will still be expected to pay back some debts over time. The period set is three years. Also, whilst bankrupt, your credit rating will naturally be low. you will thus struggle to obtain any new credit during this period. Your credit rating will be impacted for a further 6 years.

Other Considerations

What’s more, if you are a homeowner, that home may be at risk. You may be forced to sell up. You could also lose pension savings, your job (in certain professions), and if you are self-employed, even your own business. Bankruptcy is certainly not something you enter into lightly.
Finally, your bankruptcy status will become public knowledge, whether you like it or not. The only exception to this is if you have good reason to believe that you or your family could be the victims of violence if it’s known that you’re bankrupt.

Is Bankruptcy Right For Me?

The disadvantages all seem very daunting indeed. However, that is not to say bankruptcy is not the right option for you. It still might be, if  you can’t see how else you can pay off your debts, you own little of value or have no equity in your home. In addition it may suit if there is little chance of your situation improving.

Bankruptcy is not designed solely for people with massive debts. There’s no minimum level of debt required for you declare bankruptcy. If your unsecured debt is greater than the value of your assets, bankruptcy is something to consider, as one of a number of options.

What Other Options Should I Consider Before Bankruptcy?

There are particular circumstances when bankruptcy isn’t the best option. Such as if  your debt is under £20,000 and your assets are less than £1,000 in total (excluding a vehicle worth under £1,000 and some basic household items.). Also, it may not be for you if declaring bankruptcy would lose you your job, you want to keep your debts private or if you see brighter times ahead, financially. We suggest that you always seek professional advice before deciding your course of action.

Alternatives to Filing Bankruptcy

If you decide against bankruptcy, there are plenty of alternatives. These include a debt relief order ( if you owe less than £20,000, have under £50 a month available to pay your creditors and your assets total under £1,000), or an individual voluntary arrangement to pay off your debts over a fixed period. If you have unsecured debts of less than £5,000 and have a county court judgement against you, an administration order could be a better option.

Debts Not Included in Bankruptcy

Although most debts will be written off at the end of your bankruptcy period, not all debts are included. If you owe certain types of debts, you’ll still need to decide how you’re going to pay them off. These include:

  • Magistrates court fines
  • Payments ordered under a confiscation order
  • Maintenance and child support payments, although you may be able to ask the court to order that you don’t have to pay this debt
  • Student loans
  • Secured debts
  • Debts owed due to personal injury or death
  • Social fund loans
  • Certain benefits and tax credit over-payments
  • Debts obtained through crime
  • If you owe debt jointly with someone else, you can include the debt in your bankruptcy, but this would leave the other person liable for the full amount unless they also apply for bankruptcy.

Mortgages & Bankruptcy

Bankruptcy does not ensure that your home is safe, especially if you fall behind with payments. If your home is repossessed and sold for less than you owe in secured loans, the outstanding debt is no longer secured and will be written off at the end of your bankruptcy. This is also the case if your home is sold after your bankruptcy has come to an end.

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