Bankruptcy is a common form of insolvency that is legally binding to both you and your creditors. It aims to give you some relief from your debts once you have agreed to some (often quite severe) terms.
During this time you are protected from legal action by your creditors, and once your term is completed, any outstanding debt is written off.
If you have excessive debts, this could be the correct option for you. However, entering bankruptcy is not something you should enter into lightly.
Pros of Bankruptcy
- All included debts will be written off at the end of your agreed term.
- Any legal action from your creditors must legally stop.
Cons of Bankruptcy
- Your assets, including your house and car, could be sold in order to raise money to repay your creditors.
- You can no longer act as a company director.
- Future credit might be difficult to obtain.
Some error has occured.
- How long does bankruptcy last?
- How much does bankruptcy cost?
- Will bankruptcy affect my credit rating?
- What happens to my assets in bankruptcy?
Generally, bankruptcy lasts for just 12 months. After this period, any included debts will be written off.
Currently (March 2018) the cost of bankruptcy is £680. This breaks down as:
- £130 application fee.
- £550 Bankruptcy deposit.
This can be paid in smaller installments if you can’t afford it all in one go, however the bankruptcy can’t begin until payment is received in full.
As you can imagine, yes it will affect your credit rating. However, if you are in the position that bankruptcy is a viable option, your credit rating isn’t likely to be very good in the first place. A bankruptcy stays on your credit rating for six years.
Once you have been declared bankrupt, it is extremely likely that any assets you may have, including your car and possibly your home, will have to be sold in order to pay back your creditors. Fortunately there are some things that aren’t included, such as equipment needed for work and many household items which are deemed to be needed by your family, these include clothing, bedding and furniture. If you have any children you will usually be given 12 months to find alternative accommodation.
Alternatives to Bankruptcy
Individual Voluntary Arrangement (IVA)
An individual voluntary arrangement (IVA) is a legal procedure for people in financial difficulties with unsecured debts. It is a legal agreement between you and your creditors to only pay what you can actually afford to pay off your debts.
Debt Management Plan (DMP)
Usually suitable for people with unsecured debts totalling under £15,000, a debt management plan (DMP) is an informal way to repay your creditors by making a single, affordable payment every month. As DMPs are flexible, the amount you pay can change depending on your financial circumstances.