Bankruptcy is a word that instills worry and anxiety, but the reality, although severe, often isn’t as bad as perceived. It is important to understand that bankruptcy is, at its core, a legal process designed to help individuals, sole traders or business partners to deal with serious financial issues.
While no one wishes to find themselves in such a situation, developing a more complete understanding of bankruptcy can help make a difficult situation easier to navigate.
In this article, we will break down what bankruptcy means, when it may be the right option for you, and what to expect if you or your business face it.
What is Bankruptcy?
Bankruptcy is a legal procedure available to individuals, sole traders or business partners who are unable to repay their debts. It is designed to provide a fresh start by writing off the majority of unsecured debts. However, it does come with considerable long-and-short-term implications for your credit, assets and ability to borrow.
How does a person become bankrupt?
You can apply for bankruptcy if you owe more than £5,000 in debts and feel you have no realistic way to repay what you owe. The process of declaring yourself bankrupt is known as a debtor’s petition. Alternatively, if you owe more than £5,000 and the creditor can demonstrate that you are unable to make payment, the creditor can petition to have you declared bankrupt.
Once an order for bankruptcy has been granted, control of your assets passes to a licensed insolvency practitioner. This person is known as the Trustee and manages the process of repaying creditors to the greatest possible extent.
What happens after you go bankrupt?
Typically, a bankruptcy order lasts 12 months. During this time, several restrictions apply:
- Your bank accounts may be frozen or closed
- Your non-essential assets (such as additional properties, vehicles over a certain value, or luxury items such as watches or jewellery will vest in the Trustee and may be sold to repay debts.
- Your income will be assessed, and you may be instructed to make regular payments if you can afford to do so. These monthly payments will be payable for the period of three years.
Once the bankruptcy is discharged, you are legally released from the majority of your outstanding debt, allowing you to start fresh financially.
What restrictions apply during bankruptcy?
While bankruptcy should not be taken lightly, one of the greatest misconceptions is that the process places unbearable restrictions on your life.
Restrictions are indeed imposed on those who declare bankruptcy, such as not being able to operate as company director. However, these restrictions are likely not as onerous as many people fear them to be.
Bankrupt individuals must declare their bankruptcy to lenders when attempting to borrow credit for over £500. They are also unable to operate as a charity trustee, and may be unable to practice under certain professional bodies, such as accountants or solicitors.
In many cases, day-to-day life continues as normal, albeit with minimal disruptions.
What happens to your credit score when you declare bankruptcy?
Bankruptcy will remain on your credit report for six years, which may impact your ability to borrow in future.
However, it is important to remember that, in many cases, a person considering bankruptcy already has a severely damaged credit score through missed payments, defaults and potentially even legal action.
Bankruptcy, in these cases, represents an opportunity for a clean slate and the ability to rebuild credit.
Does Bankruptcy mean you lose your home?
Bankruptcy doesn’t automatically mean that you lose your home. However, typically, those who own their home and have significant equity in it may need to sell the property to release funds to pay creditors.
It is important to note, however, that the Trustee is only seeking to realise the bankrupt’s share of the property equity. This means that, if you jointly own your property, the other person’s share of the equity cannot be taken. In many cases, the joint owner or a third party could buy your share of the equity, avoiding the need to sell your home.
For those who do own their home, seeking advice early is essential to minimise the possibility of losing it.
Through the right guidance at an early stage, there may be alternative solutions to financial hardships that avoid bankruptcy, such as Individual Voluntary Agreements (IVAs) or informal creditor negotiations.
Typically, people delay action for fear of repercussions. However, doing so can greatly limit the options available. Seeking professional advice early ensures that you are aware of all the possibilities available and can make an informed, confident decision.
Is bankruptcy the right option for you?
Bankruptcy is one of several solutions for those facing financial hardships, any may not be right for everyone. Other options include:
Individual Voluntary Agreements (IVAs) – a legally binding agreement to repay all or part of your debts to your creditors over a pre-determined timeframe. IVAs could avoid the restrictions of bankruptcy and therefore may be preferable to an individual acting as a company director. IVAs can sometimes be used to retain assets and offer creditors an alternative option. However, the individual must have surplus monthly income or a lump sum or asset to offer creditors towards their debts.
Debt Relief Orders (DROs) – an option for those with low income, little or no savings, and few assets whereby debt payments are paused for a 12-month period or until the financial situation improves. DROs offer a cheaper alternative to bankruptcy application and therefore is often preferred where the conditions can be met.
Debt management plans – informal agreements to pay back debts at an affordable rate. These can also be used to avoid the restrictions of bankruptcy or as a method of retaining assets. However, it can take a significant amount of time to repay the debts in full and, given that the arrangement is informal, creditors may not freeze interest or additional charges. Crucially, creditors retain the right to pursue further legal action or debt collection should the choose not to honour the agreement.
How can Cooper Associates Accountancy help you?
The decision to declare bankruptcy is never an easy one and certainly shouldn’t be taken lightly. However, it is not the end of the road. With the right advice, it can be an opportunity to move forward and rebuild your finances.
If you are worried about debt or are considering bankruptcy, it is vital that you speak to an expert.
At Cooper Associates Accountancy, we can help you to gain a complete understanding of your financial situation and the options available to you through compassionate, confidential and friendly advice.
We will guide you through the steps required and ensure that you are fully aware of how bankruptcy will impact you.
Contact us today for a fee-free, zero-obligation and completely confidential conversation about how we can help.
