What is Bankruptcy
Bankruptcy is a personal debt solution available to people in England, Wales, Scotland and Northern Ireland. It is often seen as something to be avoided. However for many people this view is incorrect.
Often the implications of going Bankrupt are no worse than any other debt solution and in fact it can achieve considerable advantages. For most people it lasts just 12 months. Normally a considerable amount of unsecured debt is written off. Also it does not automatically mean that your property will be affected.
Government advice about Bankruptcy
As well as the information found on this website the Government’s Insolvency Service has produced a useful guide to personal debt solutions which you might also find useful: “In Debt – Dealing with your creditors”.
The Money Advice Service (MAS) are an independent service set up by the Government to provide people with free advice about all aspects of personal finances. For help from MAS if you are struggling with debt please follow this link: MAS – Help if you are struggling with debt.
It is also recommended that you read this one page document produced by MAS entitled “Dealing with debt – 5 things you should know”.
Bankruptcy Advantages and Disadvantages
There are both advantages and disadvantages of Bankruptcy. The relevance of these to you will very much depend on your financial circumstances. Some of the advantages include the fact that in most cases it lasts just 12 months. You only have to make payments towards your debts if you can afford to do so and it will normally result in a significant amount of your debt being written off.
There are also disadvantages. If you are a home owner with equity in your property then this could be at risk. In addition you may have to sell a car worth more than £1000 and buy a cheaper one. You credit rating will also be affected for at least 6 years.
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How much does Bankruptcy Cost?
One of the things that puts many people off going Bankrupt is the up front cost. This is currently £705 per person in England & Wales. The amount is lower in Northern Ireland and Scotland. If you feel you will struggle with this there are various things you can do to help you get the money together. Once you have decided to go Bankrupt you stop paying your unsecured creditors. The money you save can then be put towards the fee. You may also be eligible for a reduction if you are on a low income or are in receipt of certain benefits.
What is a Bankruptcy Restrictions Undertaking?
For most people Bankruptcy will last for 12 months. However if the Official Receiver (OR) feels that you are not co-operating with them they may extend the term for 2-3 years or longer. This extension is called a Bankruptcy Restrictions Undertaking (BRU).
It is unlikely that the OR will feel you are not co-operating. Examples of non co-operation are where you have tried to hide your assets or you have made a preferential payment to any of your creditors just before going Bankrupt. Generally speaking most people do not do this and so are not likely to have the period of their bankruptcy extended.
What is a Bankruptcy Income Payment Agreement?
Going bankrupt does not mean that all of your outstanding debt is simply written off. The Official Receiver will carry out a thorough review of your income and expenditure budget. If you can afford to pay towards your debt each month you will be asked to do so. This is known as an Income Payment Agreement (IPA).
If you cannot afford to make payments towards your debts you will not be asked to start an IPA. However if your circumstances improve at any time before you are discharged payments can start at that time. Once an IPA is in place it will last 3 years unless your circumstances deteriorate in which case the payments will reduce or stop.
The number of people going bankrupt in England and Wales has been reducing since 2009. There are some significant factors causing this. Firstly many people have started to use a Debt Relief Order as an alternative to bankruptcy. In addition the up front cost of going bankrupt has risen significantly. When faced with paying this fee especially as a couple many people chose to start an alternative debt solution which has no up front charges.
Bankruptcy and the law
The law governing Bankruptcy in England and Wales is based on the Insolvency Act of 1986. In 2002 the Enterprise Act introduced some changes. Most notably the standard length of bankruptcy was reduced from 2-3 years to 12 months. Since 2002 there have also been a number of updates to the rules that Official Receivers must follow when administering a Bankruptcy. These include the fact that it is no longer necessary to advertise bankruptcy in the newspaper (other than in Northern Ireland). Also when an IPA must be implemented and the process for buying back the beneficial interest in a property.
What are the alternatives to Bankruptcy?
Before deciding to go bankrupt you should also consider the other solutions available to you. In England, Wales and Northern Ireland these include Consolidation, a Debt Management Plan), Individual Voluntary Arrangement (IVA), Debt Relief Order) and Administration Order. The alternative debt solutions available in Scotland are different to those available in England, Wales and Northern Ireland. For more information see: Debt Solutions in Scotland
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