Anyone who is struggling to pay their debts have the potential to be declared bankrupt, but it should only be considered once alternative debt solutions have first been explored.

If you are worried about missed payments or financial difficulties and considering bankruptcy, contact PayPlan today for quick, free and professional advice to help you find a better solution.

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What is bankruptcy?

Bankruptcy can occur when an individual’s debts are greater than their assets. Declaring bankruptcy means an individual is financially insolvent and can be relieved of outstanding debts.

In the UK the term applies to individuals; administration or liquidation is the term applied to companies or organisations (read more about business insolvency).

Bankruptcy will deal with all of your unsecured debts, including:

  • Bank loans
  • Payday loans
  • Overdrafts
  • Credit cards and/or store cards.

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What are the alternatives to bankruptcy?

If you think you are likely to go bankrupt and are unable to repay your debts, you could still be in a position where you can choose from these better alternatives to avoid the consequences of bankruptcy:

  • IVA (Individual Voluntary Arrangements) This is legally binding and allows you to keep ownership of your assets as well as make reduced and affordable repayments for a specified period (generally five years) after which time the remaining debt is written off
  • DMP (Debt Management Plans)An informal way of paying your debts that allows you to make reduced payments to your creditors based on what you can afford after your living costs. This lasts until the existing debt is cleared or until your circumstances improve

In cases where it is decided by an Official Receiver that a bankruptcy has been brought about through the person’s own irresponsible or imprudent conduct, the Official Receiver is able to apply for a Bankruptcy Restriction Order, which can be applicable for between 2 and 15 years, in addition to the normal length of discharge.

Examples where this may be deemed the case include:

  • Debts which have been incurred as a result of gambling
  • Incurring debts that have arisen as a result of precarious or risky conjecture
  • Failure to produce of retain records

Remember, bankruptcy is not the easy way out, and there are alternative solutions available.

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Key things you should know about bankruptcy?

Before considering bankruptcy as a solution to unpaid debts or unmanageable debts, there are some key factors you should be aware of:

  • In order to apply for your own bankruptcy you must be a resident in England, Wales or Northern Ireland and able to afford the fee of about £655 in England & Wales (£647 in Northern Ireland) to start proceedings.
  • Creditors may petition for your bankruptcy if you owe an unsecured debt to the value of £5,000* or more. However, this is uncommon as it comes at a large cost to the creditor in both time and money.
  • Bankruptcy usually lasts for a year and is normally dealt with in the High Court in London. However, there are local courts that can deal with bankruptcy orders.
  • At the end of the bankruptcy period, most debts are ‘discharged’ (cancelled) meaning that the balance will be cleared and you will no longer be liable for paying your creditors, but there are restrictions on obtaining credit and working in certain professions.

*Prior to 01 October 2015, creditors could petition for bankruptcy if a creditor owed them £750 or more.

What is the process of being made bankrupt?

Before deciding to go bankrupt you should explore all of your alternatives, including an IVA and a Debt Management Plan. If you make the decision to go bankrupt you should expect to follow the subsequent process:

  • Complete the relevant bankruptcy forms (6.27 and statement of affairs)
  • Submit the form to your local court
  • Pay the fees – £655 in England and Wales (£647 in Northern Ireland) – fees correct as at 06 April 2016
  • Meet with an Official Receiver
  • Go to court to see a judge (not always necessary)
  • Become bankrupt

Ironically, if you wish to apply for your own bankruptcy you have to pay the appropriate fees involved. In England and Wales, there is a standard fee of £655 for bankruptcy – this is made up of a court fee of £130 and an Official Receiver’s fee of £525. In Northern Ireland, there is a standard fee of £647 – made up of a court fee of £115, an Official Receiver’s fee of £525 and a solicitor’s fee of £7. If you’re on a low income or receive benefits, you may be exempt from paying the court fee. (Fees correct as at 06 April 2016)

Be aware of companies who can offer to arrange bankruptcy as there may be fees involved, which would increase the cost.

Whilst many believe that becoming bankrupt is a free process, sadly it does come with costs. Should you not be able to afford to declare yourself bankrupt, it’s important that you talk to an adviser to discuss your options, and whether there is any available funding to you from local authorities or trust funds.

It is important to contact a PayPlan adviser to discuss all of your options before beginning the process of bankruptcy, as there are often more favourable solutions you may be eligible for.

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Is bankruptcy the easy way out?

Many people falsely assume bankruptcy is the easy way out of their debt problems and that you can be completely debt-free within 12 months.

Unfortunately, this is not always the case and you need to be aware of the implications of going bankrupt. This not includes a monetary cost, but it has consequences regarding future employment and financial matters.

How will bankruptcy affect me?

If you are declared bankrupt, you are no longer liable for any outstanding debts documented in the bankruptcy proceedings. This can give you peace of mind and alleviate stress. Your assets will be shared out between creditors and you can make a ‘fresh start’.

However, this doesn’t come without its repercussions. Read on for the negative consequences of bankruptcy.

What are the disadvantages of bankruptcy?

  • Once you are made bankrupt you are no longer in control of your assets. An Official Receiver will be appointed to go through your finances, assets and debts, and investigate the cause of your bankruptcy.
  • If there are valuable assets such as a house, motorhome, jewellery, car, or household effects deemed to be of excessive value, these could be sold in order to pass the funds to the creditor(s). The monies will to go towards the fees and costs of the bankruptcy and then your creditors.
  • Any member of your family, or even your employer, could be publicly examined in court if the Official Receiver believes this will aid the investigation.
  • Once a bankruptcy order has been made, the Official Receiver will give written notice of the order to a number of organisations. This will include the order being advertised in the London Gazette (an official publication containing legal notices) and possibly your local newspaper.
  • The information is also displayed in the Individual Insolvency Register (accessible on the Insolvency Service website) until three months after you are discharged.
  • If you run a business it may become necessary to close that business and any employees you have may need to be dismissed.
  • Bankruptcy will normally remain on a person’s credit file for six years from the initial date.
  • You will be obliged to declare you are an undischarged bankrupt if you apply for credit in excess of £500.
  • You can be excluded from occupations and professions, such as the Police Force, Armed Forces, Local Council and Government Offices. There may also be restrictions on you practising as an accountant/solicitor.
  • Many employers carry out background searches and this might affect promotion prospects.
  • You cannot take any part in the promotion, formation or management of a limited company without the permission of the court. You may also be unable to act as the director of a company.
  • You cannot trade in any business under any other name unless you inform all persons concerned of the bankruptcy.
  • Any pension payments received during your bankruptcy will be classed as income and may create a surplus to be paid into the estate under an Income Payment Order/Agreement. Depending on your specific circumstances, you may be able to continue to make payments to your personal pension, although it is unlikely.
  • Bankruptcy doesn’t just affect you. If you have joint debts you are both joint and severally liable, so creditors will look to your partner to pay, in full, any debt that was included in your bankruptcy. Details of your bankruptcy will be held by the credit reference agencies and, because you reside together, this could have an adverse effect on your partner. He/she may also be affected by the action taken by the Trustee in respect of your interest in your home.

If you have debt problems and are looking for an alternative to bankruptcy, contact PayPlan today for quick, free and professional advice to help you find a better solution.

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