Bankruptcy

When considering your options, one of the most recognised debt solution is Bankruptcy. Bankruptcy is the most severe consequence of debt and should never be entered into lightly. For some people, however, going bankrupt may be the most appropriate solution. It can be the best way to repay what they can of their debt, write off the rest – and make a fresh start.

Bankruptcy Explained – How it works

Bankruptcy is a formal court procedure which you can start or which one or more of your creditors owed  £750 or more can start. Your assets (with certain exceptions) are sold to help pay your creditors. However, you can usually keep your personal belongings, the contents of your home and your tools of trade (which may include your car) unless they have a high value.

If you have surplus income after meeting your essential household and personal expenses, you will have to make payments out of your income for up to 3 years.

Your assets and income are dealt with by a licensed and regulated insolvency practitioner or by a government official called the official receiver.

Bankruptcy usually lasts for 1 year, and once you have been freed (discharged) from your bankruptcy, you are released from your debts (with certain exceptions).

Pros

  • Debts are written off, with certain exceptions explained below.
  • Creditors can’t take further action unless the debts are secured on your home or other property.
  • It allows you to make a fresh start after only a year.
  • You may be able to avoid having to sell your home if your spouse, partner or a relative can buy your share of its value after any debts secured on it have been paid.
  • Your bankruptcy is entered on a public register and is advertised.
  • If you apply to the court for your own bankruptcy, you will have to pay a court fee and deposit totalling £700.
  • You will remain liable to pay certain debts – in particular:
    • student loans
    • fines
    • debts arising from family proceedings; and
    • budgeting loans and crisis loans owed to the Social Fund.

Cons

  • Any business you have will almost certainly be closed down.
  • Your employment may be affected.
  • Certain professionals are barred from practising if they are made bankrupt.
  • You can’t act as a director of a company or be involved in its management unless the court agrees.
  • You will be committing an offence if you get credit of £500 or more without disclosing that you are bankrupt.
  • You may have a bankruptcy restrictions order* made against you for 2 to 15 years if you acted irresponsibly, recklessly or dishonestly.
  • An order that will place restrictions similar to those in force while a person is bankrupt, which the official receiver may apply for.

 

Debt Relief Order Explained – How it works

You should first seek debt advice, and if a DRO is considered suitable, you will be referred to an approved intermediary*. They will check that your situation fulfils the criteria and will help you complete the online form,

and submit it for you to a government official called the official receiver. The official receiver then makes the order, if appropriate.

*An approved intermediary is someone who has been approved by a competent authority chosen by the government.

To get a DRO:

  • your debts must not exceed £15,000;
  • your assets must not exceed £300 (certain assets do not count, for example clothing, furniture and a vehicle worth less than £1,000); and
  • your surplus income must not exceed £50 a month after paying your essential personal and household spending.

A DRO will last for 1 year, and once your DRO has ended you are released from your debts (with certain exceptions).

Pros

  • Your debts will be written off at the end of the DRO. There are a few exceptions, as explained opposite.
  • None of the creditors listed in the DRO application can take further action against you without the court’s permission.
  • It allows you to make a fresh start after 1 year.
  • The fee (£90) is affordable and can be paid in instalments but the fee must be paid before the application can be made.
  • You will keep your assets and a vehicle as detailed above.
  • The approved intermediary ensures that you are given appropriate advice and that you fit the criteria for a DRO.
  • Your DRO is entered on a public register.
  • You can’t have a DRO if you have an existing bankruptcy order, an IVA, are subject to bankruptcy restrictions, or you have had a DRO in the last 6 years.
  • You won’t be able to have a DRO if you own a house, even if it has no equity (value).
  • You will remain liable to pay certain debts – in particular:
    • student loans
    • fines
    • debts arising from family proceedings
    • budgeting loans and crisis loans owed to the Social Fund.
  • Your employment may be affected.
  • Your DRO could be revoked (withdrawn) if you don’t co-operate with the official receiver during the year your DRO is in force.
  • You can’t act as a director of a company or be involved in its management unless the court agrees.
  • You will be committing an offence if you get credit of £500 or more without disclosing that you are subject to a DRO.
  • You may have a debt relief restrictions order* made against you for 2 to 15 years if you acted irresponsibly, recklessly or dishonestly.

Cons

* An order that will place restrictions similar to those in force while subject to a DRO, which the official receiver may apply for.

 

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