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Bankruptcy is a legal process that formally ends an individual’s financial liabilities with their creditors (this does not apply to Companies). You will be required to declare all your assets and these may be sold to raise funds which will be used to pay for any professional fees incurred and towards monies owed to your creditors.
When you are unable to service your creditors demands for payments and do not have viable means (or assets) to pay your debts then declaring Bankruptcy through the correct legal channel is possible. However, becoming bankrupt has severe consequences but it does allow you to start afresh.
Bankruptcy should only be considered once you have spoken to a professional adviser and organisations like the Citizens Advice Bureau. Bankruptcy is a last resort and other options should be considered before applying to become bankrupt such as speaking to your creditors about setting up a Debt Management Plan (DMP) or getting an IVA (Individual Voluntary Arrangement).
You can become bankrupt if you cannot pay what you owe, if your creditors apply to make you bankrupt because you owe them over £5000 or because you have broken the terms of you IVA (Individual Voluntary Arrangement). These are the only 3 reasons that a bankruptcy order can be granted.
It costs £680 to apply to become bankrupt. However, if you owe less than £20,000 and have no assets then you may be able to apply for a Debt Relief Order (DRO). The cost of a DRO is £90. Information on costs are available on the UK Government website – Guide to bankruptcy.
You can apply for bankruptcy online via the UK governments website here Applying to become bankrupt, or you can enlist the services (for a fee) of a licenced insolvency practitioner. The Insolvency Practitioners Association (IPA) website which can be found here lists its qualified members.
If someone you owe, one of your creditors, has applied to make you bankrupt then you should immediately establish the reasons and obtain a copy of the court order or petition. You can ask a court not to make you bankrupt but you will have to prove the debt is settled or will be settled or that you do not owe the money to the applicant.
If you choose to act for yourself then the process will be handled by an official receiver. This is a person who works for the Insolvency Service and is a representative of the court and they will become your trustee. A trustee will act as your guide through this process and has official duties & responsibilities to you and your creditors that must be adhered to.
If you engage with a competent insolvency practitioner, they will take over the role of trustee. The trustee will sell your assets, deal with official filings, coordinate communications to your creditors and keep you informed.
Once an official order has been made you must –
Once you have declared bankrupt you will need to give all of your assets to the trustee. There are some exceptions such as items you need to be able to work and everyday items such as clothing and furniture. However, if your everyday items are deemed to have substantial value then they can be taken by your trustee and replaced with a cheaper alternative.
Any equity, after the secured debts are settled (e.g. your mortgage) can be relinquished to pay off your creditors if there is no other way of settling the debts owed. For full details of what happens to ‘Sole owners’ or ‘Joint owners’ see section 5.1 here.
By declaring yourself bankrupt you will bring a close to the stresses and uncertainty that come with extreme financial difficulty. You will no longer have to deal with your creditors as they will have to deal with your trustee. Your financial affairs will be reviewed and your creditors will be paid. This is likely to be significantly less than what you owe and once the figure has been agreed the creditors cannot change their minds nor chase you for money.
Bankruptcy is a last resort as it will severely impact your financial status and credit rating for 6 years. If you choose to become bankrupt you have to accept that all of you assets that have any value, including any equity that you have in a property will/can be sold to pay your creditors. You can also lose your right to be a director of a business and any equity or stockholding in any business you are part of and will not be able to hold certain public positions.
You will have to pay for any professional person to represent you, all fees & court costs out of the value of your assets. You should be aware that all of your financial affairs will be heavily scrutinized which you are fully accountable for and that your bankruptcy will be a public record.
Bankruptcy is a possible route for a person who has significant debts, but it isn’t the only route that is available. Bankruptcies should be considered as a last resort therefore you should always contemplate other financial management strategies before choosing bankruptcies. These options include debt consolidation, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs).