Is bankruptcy right for you?

Bankruptcy is an option – sometimes an unavoidable one – available to individuals who are unable to pay their debts and are thus insolvent. You can declare yourself bankrupt or, if you owe a creditor more than £750 and can’t pay off the debt, the creditor can go to the court and ask that you be declared bankrupt.

The bankruptcy process

A court – either the High Court or your local County Court – will issue a bankruptcy order against you and appoint an Official Receiver who will deal with the administration of your bankruptcy, look into your financial affairs and inform the relevant bodies about your bankruptcy. Bankruptcy usually lasts a year (possibly less for pensioners, those on benefits, or if the sale of your assets allows your debts to be repaid). You may, however, have to keep paying a proportion of your income towards your debts for longer (see below).

Benefits of bankruptcy

• If you are declared bankrupt the court takes over responsibility for repaying the majority of your debts.
• You are protected from further action against you by creditors so they can’t take steps to recover the money you owe them or add further interest or charges.
• Usually after 12 months you are discharged from bankruptcy, and all the associated restrictions are lifted. Any money outstanding is written off (apart from student loans and non-dischargeable debts).
• Although you may lose your house and your car, you’re allowed to keep your household goods (e.g. TV, settee, washing machine).
• Your payment plan usually lasts only for three years – while you may be paying out for longer if you opt for one of the alternatives to bankruptcy.

Drawbacks of bankruptcy

• Your home and assets may be sold off to help pay your debts, although you will be allowed to keep your car if it’s worth less than £2500 plus various household items and tools, etc. necessary for your job.
• An income payment order is often made with the bankruptcy order meaning you’ll have to keep paying a proportion of your monthly disposable income towards your debts for up to three years.
• Your name and the fact of your bankruptcy will be published in your local newspaper and the London Gazette.
• You can’t take out a mortgage or obtain credit for over £250 without the permission from the lender.
• Your credit rating will be hit hard, with the record of your bankruptcy staying on your credit file for six years.  
• Student loan debts are not included so you will have to keep paying these.
• While you’re a bankrupt, there are various professions you are not allowed to practice in, including as a: lawyer (solicitor or barrister), chartered accountant, MP, magistrate, local authority member or limited company director. You are usually barred from working in the police or military too.
• You cannot be involved in the promotion, formation or management of a limited company without permission from the court and you can’t conduct business directly or indirectly in any name other than that in which you were made bankrupt

Alternatives to bankruptcy

Bankruptcy has its advantages and sometimes you won’t have a choice but to go bankrupt. If your debts are so overwhelming that no negotiation with creditors is possible, for example, or there is no way you can earn enough money to cover your debts and support yourself or your family then bankruptcy will probably be the only option. There are definite down sides though and, as outlined above, the effects of being declared bankrupt can be felt for years after discharge. There are alternatives to bankruptcy and these should all be considered before you go down the bankruptcy route.

Debt Relief Order (DRO)

Due to be introduced in April 2009, DROs are run by The Insolvency Service with debt advisers (approved intermediaries) and do not involve the courts. If an order – which usually lasts 12 months – is made, creditors named on the order can’t try to recover their cash without permission from the court. When the year is up, if your circumstances have not changed you will be freed from the debts that were included in your order. To qualify you must:

• Be unable to pay your debts.
• Owe less than £15,000.
• Have assets worth less than £300 in total (although you can have a car worth up to £1000).
• Have disposable income of £50 a month or less.
• Be domiciled in the UK, or at some time in the last 3 years have been living or carrying on business here.
• Not have been subject to another DRO within the last six years.
• Not be involved in another formal insolvency procedure at the time you apply.

Informal arrangement

If you’re struggling to pay your debts it’s worth contacting your creditors and try and come up with some alternative payment plan which would allow you to, eg pay less per month but over a longer period. The main problem with this kind of arrangement is that it’s not legally binding so your creditors could ignore it later and demand payment in full. Get advice from Citizens Advice or a debt advisor before you contact your creditors as they can advise you on how best to approach this.

Administration order

If one or more of your creditors has a court judgment against you and if your total debts are £5,000 or less, the court could make an administration order. This means you make regular payments to the court, which will then be used to pay off your creditors. Creditors can't charge you interest or take any further action against you to get their money for the duration of the order, without asking the court first. If your circumstances change and you can’t pay as agreed, you can apply to the court to alter the order. 

Individual voluntary arrangement (IVA)

If your assets are worth more than £2000 and your unsecured debts are less than £20,000 an IVA may be a better option than bankruptcy. You can apply for an IVA yourself or it may be ordered by the court. It is a formal arrangement whereby an insolvency practitioner is appointed to deal with your affairs. They will negotiate with your creditors – and as long as enough of the creditors vote to accept the payment proposals, the agreement reached is binding. The Insolvency Practitioner will then sell off your assets to pay the off the creditors, but you will have more say on how your assets are dealt with than you would as a bankrupt (e.g., if you have a regular income you might be allowed to keep your home). You obtain an interim order from the court to stop your creditors from proceeding with a bankruptcy petition against you while the interim order is in force. It also prevents them from taking other action against you without the permission of the court.