Bankruptcy: a concise guide

Benedict Rohan

Bankruptcy is one method of getting out of debt. It is a court order that transfers responsibility for dealing with creditors to the Official Receiver, who also takes control of the debtor�s money and assets and distributes them fairly to all their creditors. Once all debts have been paid or written off or an agreement reached, the individual is able to make a fresh financial start.
A bankruptcy order is granted by the court when it receives a petition (application) from either the debtor or one or more of their creditors if the amount owed is more than �750 in unsecured debt.

Bankruptcy has its advantages and disadvantages although it�s an extreme measure and should be considered very carefully. Just because you�re in a lot of debt, it doesn�t mean that bankruptcy is your only option. You�ll need to speak to a financial expert who�ll advise on the best course of action for you. Some useful sources of help are the Citizen�s Advice Bureau, the government Insolvency Service, the National Debtline or the Consumer Credit Counselling Service.

Advantages of bankruptcy:

your creditors will be dealt with by the receiver

court action against you to recover money may be stopped

your debts may be written off

you�ll be allowed to keep a certain amount of money and household items to give you a reasonable standard of living

you�ll be able to make a fresh start when the bankruptcy order has been cancelled

Disadvantages of bankruptcy:

you may have to pay a court fee of up to �475 for the bankruptcy order

not all debts can be written off � e.g. court fines

your details will be entered onto a public register of bankrupt individuals so other people will find out about it

you won�t be able to apply for any more credit while the bankruptcy order is in force

you may lose your home or any luxury possessions that you own if they have to be sold to repay your debts

if you own a business, it may be closed down and the assets sold

you could lose your job depending on your employer and what profession you work in � some don�t allow individuals who become bankrupt to continue working

you may be subject to a bankruptcy restriction order, which can make it very difficult to take out credit or other financial products

homeowner loans in the future � this might happen if you have been reckless with your finances or have been dishonest or uncooperative with the Official Receiver

Petitioning for bankruptcy:

Bankruptcy orders are arranged by your local court. You�ll need to fill out a couple of forms � a petition and a state of affairs, which can be obtained from your local court or from the government�s Insolvency Service website (www.insolvency.gov.uk). You�ll need to list all your debtors and all your assets � from bank accounts to valuable possessions. It�s a criminal offence to make a false statement on these forms, so you must be truthful. It�s also illegal to sell any items before the bankruptcy order or to hide any goods that you own.

The court will review your case and will only grant you a bankruptcy order if it feels that you have no other means of solving your debt problems. Once the order is in place, your accounts and assets will be frozen and the Official Receiver will investigate your finances. First they will interview you. Then they�ll give notice of your bankruptcy order to various bodies, such as your local authority, sheriff court, land registry, utility companies, banks, insurance companies, landlords and solicitors, in order to determine what debts you owe and what assets you have. Once the Official Receiver has compiled a comprehensive report on your finances, a copy will be sent to all your creditors and your assets divided equally among them.
You�ll normally be discharged from your bankruptcy order within a year, by which time your debts will either have been paid back or written off.

Alternatives to bankruptcy:

If your debts haven�t gone too far down the line, it may be possible to come to an informal arrangement with your creditors that will allow you to repay your debt in a manageable way. You can try to negotiate a repayment plan in which you make your repayments in affordable regular instalments. It may cost you more in interest in the long term, but it could be a more viable option than bankruptcy.

If this doesn�t work, a formal, legally binding arrangement called an Individual Voluntary Arrangement may be able to be set up with your creditor. You�ll need the services of an insolvency practitioner to arrange this.
Alternatively, insolvency practitioners also offer debt management plans, in which they take on management of your debts for a fee.

If one or more creditors has obtained a county court judgement against you and the total owed is less than �5,000, you may be able to apply for an administration order at your local court, under which your repayments to your creditor are made via the court, which takes a portion of the repayment for administering the repayments.