Why bankruptcy should be your last resort
If you’re completely overcome by debt and simply cannot cope any longer, you may be considering applying for bankruptcy.
It’s not only extremely stressful to be unable to repay your debts and make ends meet but it can cause havoc in all areas of your life. Bankruptcy allows you to have your debts written off after a period of about 12 months and allows you to enjoy a new start to a debt-free life.
If you currently owe £20,000 or more and do not have sufficient cash flow to make any payments towards your debts, applying for bankruptcy may be a suitable option. It is, however, a drastic move that will have an effect on various areas of your life including your ability to work in certain professions, apply for credit or even find a rental. Bankruptcy may, however, clear many of your debts including your mortgage, car loan, credit and store card debt as well as any business and joint debts you may have.
How creditors can have you declared bankrupt
While most people apply for bankruptcy directly, many people are declared bankrupt by a court as a result of a creditor. If you owe $5,000 or more, the creditor will be able to apply to have you declared bankrupt but, they must’ve served you with a statutory demand and/or tried to attach property in an effort to enforce a judgment.
Tip: If you’re served with a statutory demand, it’s important to seek legal and/or specialist advice. You can contact the Citizens Advice Bureau or a legal advisor of your choice and receive personalized advice.
The advantages of going bankrupt
One of the major advantages is that you will not have to repay any of the debts covered by the bankruptcy application. For instance, your car finance agreement will be canceled and you will have to return the car but will not have to pay the outstanding balance. If you need your car for work or are a carer, you may be able to keep it.
If you have a regular income and can cover some of your repayments, you’ll have to do so for a period of 3 years. Your creditors will not be able to harass you and, they won’t be able to take further legal action against you.
Which debts will not be covered?
Student loans, secured loans, child maintenance arrears, court fines and compensation orders will not be covered by your bankruptcy. Contrary to popular belief, joint debts may be covered by bankruptcy, but a creditor may still pursue the other party to settle the debt in full. Guarantor loans (for which someone else stood as a guarantor for you) will also not be covered.
Consequences of bankruptcy
- If you’re a homeowner, your home may be repossessed and the proceeds of the sale used to repay some of your debts.
- Any other asset of value that you own may be sold to pay off debts. Any savings will also be put toward debt payments.
- Your accounts will be frozen.
- You will be unable to borrow more than £500 without informing your lender that you are bankrupt.
- Your bankruptcy will be public record and may affect your ability to work in certain professions or even find a rental. In some cases you may lose your current rental lease once declared bankrupt.
- Your credit rating will be affected as the bankruptcy will be listed on your credit file.
How to declare bankruptcy
To apply for bankruptcy, you must complete a form online, pay a £130 adjudicator fee and a £550 deposit fee and wait for your bankruptcy order to be made (which will take no more than 28 days). Prior to completing the application, you should make a list of all your current debts as well as all sources of income.
What happens once you’ve been declared bankrupt? Once a bankruptcy order has been granted, all of your income, assets, and debts will be reviewed and come under administration by the official receiver or an appointed trustee. They will attempt to pay your creditors using any available assets or cash.
After a 12-month period (or longer in many cases), you’ll officially be discharged from bankruptcy and will no longer have to worry about any of the debts that the bankruptcy application covers. You can get a confirmation letter to prove that you have been discharged. We recommend that you send this to all credit agencies once you receive it so that your file can be updated.
Alternatives to declaring bankruptcy
As mentioned, declaring bankruptcy should be your very last option. There are alternatives to bankruptcy for you if you have some income that you can use to repay debts or if your total debt is below $20,000. Here are a few viable options:
- You can call your creditors and make an arrangement to repay your debts as per your current budget
- Enter into a debt solution agreement with your creditors • Have a debt management plan drawn up
- Apply for an administration order
- Apply for a debt relief order
- Apply for an individual voluntary arrangement
Remember that regardless of the financial situation you’ve found yourself in, there’s always a solution and someone willing and able to help. You can seek advice from a financial or debt advisor or approach the Citizens Advice Bureau to help you decide on the best way forward.