What is bankruptcy?

Bankruptcy is often considered the last resort by individuals struggling to repay their unsecured personal debts. While the word can strike fear in many, depending on your circumstances, bankruptcy can be a suitable way to remove burdensome debts.

In the UK, only individuals can go bankrupt. The equivalent for limited companies is a Creditors Voluntary Liquidation (CVL).

How do I go bankrupt?

You can apply to make yourself bankrupt, or a creditor can apply to force it on you. Doing so is only permitted if you owe them at least £5,000. The process lasts one year and will protect you from creditor pressure.

Am I suitable for bankruptcy?

Before you can apply for bankruptcy, you must have lived in England or Wales for at least the last six months. You should also consider what field you’re employed in; certain professions won’t allow you to practice if you go bankrupt, you should check with your employer or trade union. These include solicitors, accountants and police.

It is also not recommended you apply for bankruptcy if your total debt is less than £20,000, for amounts less than this, you could apply for a Debt Relief Order.

Bankruptcy may be a viable option if your unsecured debts are so severe that you can’t afford an Individual Voluntary Arrangement’s (IVA) monthly payments, you don’t have many high-value possessions, or you have a home with little or no equity.

If you’ve already failed an IVA or other debt relief solutions, bankruptcy might be your only remaining option to repay the debt.

What debts are covered?

Bankruptcy will cover and write off most of your unsecured debts at the end of the arrangement.

The following debts, however, are not automatically covered:

• Courts fines
• Maintenance and child support payments
• Personal injury claims against you
• Social funds, student and secured loans
• Benefits and tax credits

If you owe a creditor these, they can take action to retrieve their money. Your mortgage lender could also repossess your home if you default or fall behind on your payments.

What could I lose in bankruptcy?

If you go bankrupt, you could have some of your belongings sold to recover the debt. Personal vehicles are usually sold, although the trustee could make them exempt under exceptional circumstances.

Household items typically won’t be sold unless the trustee believes they can be replaced for a lower costing equivalent.

Your bankruptcy will stay on your credit file for six years, and your credit rating will suffer. You will also be barred from setting up a limited company or acting as a director for the duration.

What alternatives are there to bankruptcy?

Bankruptcy isn’t the right option for everyone, and if you wish to avoid it, you can apply for an IVA (Individual Voluntary Arrangement). IVAs are formal monthly arrangements which allow you to repay a portion of your debt in monthly instalments. You’ll have to meet certain criteria before you can apply for an IVA.

• We, as insolvency practitioners, take control of all communication with your creditors, saving you the stress of dealing with them.
• The IVA provides some protection from creditor action. All of which is frozen for the duration of the arrangement.
• Remaining unpaid debt is written off after the arrangement concludes.
• If you have assets such as vehicles or property, an IVA may be preferable to bankruptcy.

If you’re unsure which option would be best for your circumstances, speak to one of our initial advisors. We can assess your individual requirements and help advise you the best way forward.

Can companies go bankrupt?

You may have heard in the news about American companies “going bankrupt”. In the UK, bankruptcy only applies to individuals and not companies. The equivalent of the USA’s company bankruptcy is a liquidation, which can either be voluntary or compulsory.

In summary

Bankruptcy is a state of personal insolvency where an individual can’t pay back their unsecured debts worth more than £5,000. It isn’t the only debt relief option, and other methods are available. While it may be considered a last resort when those other solutions aren’t viable or have failed, it can be the most suitable solution for some. Personal assets or belongings could be sold to repay the debt. Bankruptcy generally lasts a year, although it stays on your credit file for longer. Your credit rating will be heavily affected by the bankruptcy, and you won’t be able to form a limited company or act as a director.

How we can help

If your unsecured debts are impacting your life and you’re looking for a way to ease pressure from your creditors, contact us. We can advise you on how to proceed and what the best option would be going forward. Our initial advisors and licensed insolvency practitioners are impartial and can offer you free advice with no obligation.

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