“Bankruptcy” is a term that can strike fear into the heart of anyone coping with personal debt. However, many thousands of people in the UK are faced with the prospect of bankruptcy every single year. If your debts are insurmountable, and other forms of debt help are beyond your reach, bankruptcy may be your only option. We provide a little information on the subject and try to shed light on some of the myths.

So what exactly is bankruptcy?

In essence, bankruptcy provides any individual (or company) struggling with insurmountable debt a means to wipe the slate clean in order to start over.

As a bankruptee, you will be expected to relinquish all of your assets (including your home) and any possessions of value, in order to pay back (as much as possible) to your creditors. The sum of your assets is divided equally among your creditors (people you owe money to), by an appointed receiver.

You will be required to raise a petition of bankruptcy, which must be presented to the courts by either yourself or your creditors. Once you are declared bankrupt, it is required that your status be published in your local newspaper. At this stage you will no longer have control over any of your assets, as they will fall into the control of your official receiver.

Your official receiver will then liquidate your assets in order to pay any costs associated with your bankruptcy and will split the remainder amongst your creditors. It is also common for the court to order you to pay any additional monies from your salary (after normal cost’s of living) to your receiver.

What are the other implications of bankruptcy?

If you are made bankrupt, you will remain as a bankruptee for 3 years. After that time you will be “discharged” from the agreement and any financial barriers associated to the status are removed. 

However, there are exceptions to the rule. If you have been made bankrupt before, in the past 15 years you will not qualify for a discharge until 5 years have surpassed, you must then apply directly to the courts in order to do so.

If you have presented the petition to the courts yourself and have total unsecured debts of less than £20,000 your bankruptcy level is deemed small, in this instance you may be discharged within 2 years of filing.

After I am discharged, can I start over?

Once the term of bankruptcy has been served and you are discharged from the process, you can finally start to return to normality. However, you will still be liable for any debts associated to family court proceeding such as financial disputes. The record of your bankruptcy will also be recorded for five years on the insolvency register. It is possible to apply for credit if you wish and you will not be required to mention your bankruptcy, unless you are asked.

Are their ways of avoiding bankruptcy altogether?

The only plausible way to avoid bankruptcy is through an IVA. Although the process is conditional, and relies heavily on creditor agreement and your own financial circumstances, the IVA process does offer many benefits over bankruptcy status. Some benefits include the protection of your home and other assets. You are also not required to publicly announce your IVA status as with bankruptcy.