What is bankruptcy, what does it mean?

Bankruptcy, put simply, is the legally declared inability of an individual to repay their creditors.

Here, we will explain why for people in extreme situations, bankruptcy can be a sensible option and talk you through the process to see if it’s right for you. Also, we will reveal some new alternatives to bankruptcy which may be more suitable in improving your current financial health.

A decision to go bankrupt should not be taken lightly, and there are significant consequences to bear in mind. You can lose your home as a result of bankruptcy and it will have a significant effect on your credit rating.

What do I have to do?

A decision following a bankruptcy hearing can go one of four ways:

• The Court can make a bankruptcy order - making you officially bankrupt with immediate effect
• The Court can dismiss the bankruptcy order, issuing an administration order instead
• The Court can delay proceedings if more information is required
• The Court may decide that an IVA (individual voluntary arrangement) would be an appropriate solution, appointing an Insolvency Practitioner to set up and run it. You can refuse this by letting the Courts know

If you are made bankrupt you will have to:

• Hand over all documents, books and records relating to your financial affairs
• Declare any property that you acquire during the period of bankruptcy, including any that you inherit and any share of property owned
• Provide details of any redundancy pay or pension plans that you receive during the period of bankruptcy
• Complete and return the Official Receiver’s questionnaire relating to your financial situation, and attend any meetings that he may ask you to attend
• If necessary, attend a meeting of creditors
• Provide any other details the Official Receiver reasonably requests

How will bankruptcy affect my future?

In terms of credit rating, a bankruptcy order will be registered with every credit reference agency for a minimum of six years to a maximum of fifteen years, depending on an individual’s circumstances. With future mortgage applications, you may have to declare a previous bankruptcy, even if it has been discharged. To discharge a bankruptcy you should apply to the courts after a minimum of five years.

For further information about bankruptcy, please click on the following link: http://www.insolvency.gov.uk/bankruptcy/whatisbankruptcy.htm

Alternatives to bankruptcy

You can avoid bankruptcy in four ways. Often your situation will allow you to remortgage or take a debt consolidation loan, but in addition there is the further option of taking a debt management plan (an informal arrangement) or an IVA (a legal solution).

In the case of IVAs, creditors often see this as a more favourable arrangement, since the costs of administering an IVA are considerably lower than in bankruptcy.

IVAs also operate as an insolvency procedure and creditors can reclaim tax and VAT relief, again a plus for the creditors and a plus for you. Furthermore, in all cases of avoiding bankruptcy there are, in theory, no restrictions regarding personal credit although in practice you would be unlikely to get any.

The key to remember when considering these options is the flexibility they offer, particularly when set against bankruptcy.

Read more about IVAs - Read more about Debt Management Plans