What is Bankruptcy

The official definition of bankruptcy is “a legally declared inability or impairment of ability, of an individual or organization to pay its creditors” – in other words being unable to pay your debts. It can be an important option to consider when an individual is ‘insolvent’ – the term for being unable to pay your debts as they fall due with no likelihood of being able to pay them in the future.

Creditors can file a bankruptcy petition against a debtor owing over £750 – known as involuntary bankruptcy – to try and retrieve a percentage of what they are owed. The supervisor of an entered IVA can also file for bankruptcy against a debtor, if the IVA payments are not made. In the majority of cases, however, it is initiated by the debtor – a voluntary bankruptcy.

When you file for voluntary bankruptcy, it effectively releases you from the pressures of creditors you have no way of paying in order to make a new financial start, with any assets being shared equally amongst your creditors.

Bankruptcy is a good option for people with significant debts, who do not own a home with positive equity in it or any other valuable assets. The restricted term for bankruptcy is 6-12 months – far less in comparison to an IVA, which is for 5 years.

What happens when I file for bankruptcy?

• You are released from the worry of debt. NO further action can be taken against you.
• You will lose control of your assets – these fall under control of a Trustee, either the Official Receiver – a civil servant and officer of the court – or a licensed Insolvency Practitioner .
• All assets will be divided equally between creditors.
• You will be unable to obtain credit for over £500 without permission from the lender.
• Your bankruptcy remains on your credit file for 6 years – as does an IVA.
• Anyone can go bankrupt, but certain professions will be adversely affected, or are prohibited from continuing to practice, for the duration of your bankruptcy term.

For details of these professions, see Is bankruptcy right for me?