The word ‘bankruptcy’ strikes fear in the hearts of business owners and individuals. It’s very easy to conjure up thoughts of debt consuming your life, losing everything you own and ending up penniless. However, while many would go to any lengths to avoid bankruptcy, sometimes it can actually be the best solution to clear a person’s debts.
What is bankruptcy?
In the UK, bankruptcy is a state of personal insolvency where an individual is unable to repay their debts. Though you may have heard of companies ‘going bankrupt’, that term applies to those in the United States of America. In the UK, insolvent companies can close through a liquidation.
An individual can get into debt for many reasons, be it loans, credit cards, a sudden change of circumstances, overspending etc.
If you owe more than £5,000, your creditor can make you bankrupt. Afterwards, you’d be asked to provide details of your assets and finances. You may have to sell any high-value assets you own (homes, vehicles etc.) and use the generated funds to repay your creditors.
Your bankruptcy is made public and lasts for one year, and may affect your profession if you work in:
- Financial roles (such as banking or accounting).
- As a director of a limited company.
- As a licensed insolvency practitioner.
- Certain roles in the gambling sector.
- Police and law-related careers (solicitors).
- Pub ownership.
Can you avoid bankruptcy?
If your creditors are pressuring you for repayment of unpaid debts, if possible, you should repay them within the specified time. If full repayment isn’t possible, you do have other options.
One of the most popular options is to repay your debts as part of a formal repayment arrangement. ‘Individual Voluntary Arrangements’ (IVAs) allow you to pay off your unsecured debts at an affordable rate tailored to your circumstances. These arrangements work best if you have a large amount of debt to multiple parties; usually £10,000 or more, if you own assets you wish to protect from repossession, or if you have the income to support the monthly repayments.
Whether you can maintain the repayments will have a considerable bearing on your suitability for an IVA. If you default on the payments, the IVA could fail, and the overseeing insolvency practitioner could make you bankrupt.
When might bankruptcy be your best option?
The thought of bankruptcy can strike fear in anyone with debts, and many would go to any length to avoid it. However, there may be circumstances in which going bankrupt would be preferable to trying to repay the debts.
Bankruptcy may be suitable if your debts aren’t sizable enough to justify a repayment arrangement or other recovery options. It may also be suitable if you have few high-value assets (vehicles, property etc.) Although it has a severe impact on your credit rating, bankruptcy tends to last for one year, where other repayment arrangements can last longer.
If you suspect your creditors will attempt to make you bankrupt, you can apply for it yourself, which carries a fee of £680.
While bankruptcy can feel like the last resort for anyone’s finances, it doesn’t have to be as catastrophic an end as it is often portrayed. In the UK, bankruptcy only applies to individuals, and arrangements to clear personal debt do exist without forcing people to go bankrupt. The suitability of these arrangements depends on whether the indebted person can afford the repayments or have assets worth protecting. If neither of those applies, then bankruptcy might not be as disastrous as people think.