Worried that you could go under in the current economic climate? Follow Your Money Guides tips on how to go bankrupt with our guide to going bankrupt.
Today alone, around 300 people will declare themselves bankrupt or insolvent and 74 homes will be repossessed. And, according to online credit information provider Equifax, 130,000 people are expected to be declared insolvent by the end of this year – a large increase on the 2007 figure of just over 100,000.
When Going Bankrupt is the Best Option: What is Bankruptcy?
Bankruptcy is a court order that you can apply for and in some cases is inflicted upon you. If you declare Bankruptcy a civil servant titled an Official Receiver gains control of your money and property. Creditors you owe money to will be forced to leave you alone and take up issues of debt with your Official Receiver.
Your Official Receiver will usually sell off your assets and use the proceeds to pay your creditors. Any outstanding debt is then written off.
When Going Bankrupt is the Best Option: How Do You Go Bankrupt?
To go bankrupt you must fill in a bankruptcy petition (form 6.27) and statement of affairs (form 6.28) available from your local court that deals with bankruptcy. You will have to pay a fee of around £495 which covers a court fee of £150 and the Official Receiver fee of £345 (although figures may vary depending on each situation). Those who wish to go bankrupt are advised to check they have enough cash to live off if your bankruptcy petition is accepted. The reason for this is that all bank accounts will be frozen during your bankruptcy.
In your request to go bankrupt you will be required to detail your income, outgoings, debts and assets. Your petition will then be examined and a court will decide whether your petition is successful and make a Bankruptcy Order. Afterwards you will be interviewed by the Official Receiver.
If you are unable to pay bankruptcy fees you may be able to request exemption using an EX160A form. Additionally, if you receive income support the £150 court fee will be waived. Otherwise organisations such as the Council Credit of Counselling Service advise you try and save for bankruptcy if this is the best solution for you.
When Going Bankrupt is the Best Option: What Are the Benefits of Going Bankrupt?
According to Advice.org.uk some people in severe debt may benefit from going bankrupt. This is because the procedure will mean you no longer have to deal with your creditors – this can be an extreme relief to those in debt, lifting away the heavy weight of concern and worry off your shoulders. Creditors will also have to drop court charges against you (however bailiffs may still be able to take your belongings).
Once you’ve completed your bankruptcy order you can make a fresh start with your finances. In most cases this would be a year after the order has been put into action.
When Going Bankrupt is the Best Option: When Should You Go Bankrupt
Bankruptcy should only be used by those who are in severe debt and even then bankruptcy should be your absolute last option. This means you have explored and tested all other available options in order to relieve yourself from debt.
Other solutions to severe debt may include the following: Individual Voluntary Arrangements (IVA), a Debt Management Plan, an Administration Order, Consolidation Loan or Full and Final Settlements. Below is a description of these options.
When Going Bankrupt is the Best Option: Alternatives to Bankruptcy
Avoid Bankruptcy: Individual Voluntary Arrangements (IVA)
Individual Voluntary Arrangements (IVA) is a formal agreement set up by an Insolvency Practitioner between you and your creditors where you come to an agreement to make reduced payments towards to amount you owe, with the debt generally being settled after 5 years. However this option is only suitable if you have an income which can cover the agreed payments. The main benefit is that you keep your assets, but it will still affect your future credit rating.
Avoid Bankruptcy: Debt Management Plan
A Debt Management plan requires your financial situation to be fully assessed by a debt management professional. Once your total income, expenditure and the money you owe are calculated, a realistic figure of how much you could afford to pay back each month will be estimated. Your creditors will then be approached and asked to accept the reduced payments. Most creditors will accept the proposal.
Avoid Bankruptcy: Consolidation Loans
For those who are juggling debts from credit cards, store cards and loans you may benefit from taking out a consolidation loan. A consolidation loan allows you to pay off a large number of debts at once, leaving you with just one monthly payment to deal with. Also, if you owe lenders varying rates of interest it is possible to get a consolidation loan with a much lower interest rate. This means you could save hundreds of pounds by paying less interest. However there are disadvantages and you must examine all types of consolidation loans available before signing up.
Avoid Bankruptcy: Administration Order
Similarly to bankruptcy an Administration Order is a court order; however it works in a very different way. This order requires you to pay the court a monthly fee which will then be distributed amongst your creditors dependent on a pro rata basis. Like bankruptcy creditors will not be able to take court action against you or harass you for the debt. However the court will take 10 percent of your monthly payment as a fee.
Avoid Bankruptcy: Full and Final Settlements
Full and Final Settlements allow debtors to pay a significant proportion of what they owe to their creditors but not necessarily the full amount. To do this you must come to an agreement of how much you will pay with your creditors. You must then pay the settlement as a lump sum, all at once and the remaining debt will be cleared.
When Going Bankrupt is the Best Option: Disadvantages of Bankruptcy?
Mel Mitchley from building society and consumer credit information service MyCallcredit, argues that bankruptcy has serious consequences in terms of the current and future assets held by an individual.
Bankruptcy can affect your financial status and options for a long time after you have served the court order.
“Any hopes of future home ownership may be ruined and even something as simple as opening a bank account may become difficult,” comments Mitchley.
Ann Robinson, Director of Consumer Policy at price comparison website uSwitch.com, agrees. She says that it is worrying that so many people are resorting to individual insolvencies, be it an IVA or bankruptcy, to resolve their personal debt problems.
“These measures should always be the last resort for anyone with financial problems as they have a very serious impact on people's credit histories and their ability to borrow in the future,” she says.
“In the case of bankruptcy, it could also impact on employment prospects.”
A separate study uSwitch claims those who declare themselves bankrupt are effectively destroying their credit history, making it difficult to obtain a mortgage in the future or if they are successful they could be charged extremely high interest rates.
To summarise, it is important to remember that job opportunities after bankruptcy may be limited and unattainable in certain professions, for example an Estate Agent, Insolvency Practitioner or Stock Broker. You may also find it difficult to obtain credit cards and your chances of getting a mortgage are significantly lowered.
When Going Bankrupt is the Best Option: Other Disadvantages of Going Bankrupt
According to the Consumer Credit Counselling Service (CCCS) - a registered charity responsible to give impartial and independent advice to those in financial difficulty by providing free recognise the benefits of going Bankrupt. However they also point out a number of disadvantages to bankruptcy. Below is a summary of those points.
1. You may lose your home.
2. Your possessions may have to be sold which means you could lose valuable or luxury items.
3. If you own your own business you’re more than likely to have it sold buy your Official Receiver.
4. Future immigration will be made difficult.
5. Knowledge of your Bankruptcy will be made public this is so that all creditors you owe money to are notified. This means that your name and notice of your bankruptcy will appear in the legal section of your local newspaper and the London Gazette.
6. Bankruptcy does not rid you off all debts- student loans for example are not written off by Bankruptcy.
7. An Official Receiver could ask the court to make a Bankruptcy Restrictions Order (BRO) against you. This would mean the limitations of a Bankruptcy order could last up to 15 years.
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