Bankruptcy
Explainer
Bankruptcy is the final stage of dealing with too much personal debt. If a person is declared bankrupt, their financial position is reset but there are consequences. Any assets of value will be lost and their ability to do things such as get a bank account or mortgage in the future will be affected.
Bankruptcy is a legal process for individuals (not companies) who can’t repay their debts. If someone is in a lot of debt, declaring bankruptcy can be a way to clear it, but an individual may also be forced into bankruptcy by their creditors.
How does someone become Bankrupt?
You can only be declared Bankrupt by a Court order. A person can apply to declare bankruptcy themselves if they owe more than they can pay and want a way out. Alternatively, a creditor (someone they owe money to) can apply to make them bankrupt if they owe them at least £5,000.
An individual can seek their own bankrutpcy by applying online.
How does it help?
Bankruptcy means that an individual can be free of debts that may have been hanging over their head for years.
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It does have consequences but for many people, it can provide welcome peace of mind.
What happens in a Bankruptcy?
Once a banlruptcy application is approved, a bankruptcy order is issued. This order means that an official, called a Trustee in Bankruptcy, seeks to sell an individual's assets to pay creditors.
The trustee will sell most valuable assets, like property, cars, or expensive belongings. However, they usually allow people to keep basic things needed for everyday life, like clothes, work equipment, and a modest car if it’s essential for work. The Bankrupt can still work and earn money during bankruptcy although they may be asked to pay surplus income to the Trustee to assist with paying off debts.
Bankruptcy typically lasts 12 months, during which certain financial restrictions apply. After that, most remaining debts are written off, which means they no longer have to be paid.
What are the effects of Bankruptcy?
During and sometimes after bankruptcy, there are restrictions. An individual is unlikely to get certain types of credit or be permitted to hold certain jobs (especially in finance).
Bankruptcy also affects a person’s credit score for six years, which can make it hard to get loans, mortgages, or other credit in the future.
After 12 months, the person is discharged (released) from bankruptcy, meaning they are free from most of their remaining debts. However, there may still be restrictions if the trustee suspects the person wasn’t honest about their finances.