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.
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).
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.
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:
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.
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.
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.
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