In part eight Nick Lord looked at the pros and cons of individual voluntary
arrangements (IVAs). Now in part nine he examines how bankruptcy works.
Use our quick links to skip to other sections of this guide:
Bankruptcy is a formal legal process that draws a line under your debts. It
involves the sale of any items of value that belong to you (but some items,
such as your basic household goods will not be taken). It may also require that
you make regular payments from your income if you can afford this after you
have paid your essential domestic and work costs.
Bankruptcy is not an easy way out of paying your debts but it is an option to
consider if you face overwhelming debt pressure and can see no possibility of
being able to meet your liabilities. It is generally a more attractive option
for those with few or no assets.
How bankruptcy works
Bankruptcy can be started by the person who owes money or by the firms who are
waiting for missed payments. Banks and other finance companies will generally
only make someone bankrupt if they think if it is financially worthwhile.
However, this does not stop them threatening bankruptcy even where they know
that they will not follow through. If you are being threatened with bankruptcy,
you should get advice urgently (your local Citizens Advice Bureau or other free
independent advice agency is a good starting point).
Once bankrupt, you are under the control of the bankruptcy trustee. They will
arrange to sell items of value belonging to you (including your house if you
are a homeowner and the sale value is more than your mortgage debt) and will
want to discuss what regular payments you can make. The trustee has the power
to examine the way you conducted your finances prior to bankruptcy,
particularly if you gave away or sold assets. You are required to cooperate
with the trustee.
A recent change in the law means that those experiencing bankruptcy for the
first time can normally expect to be discharged after a maximum period of one
year. You are then released from your debts (although you may be required to
make regular payments for up to three years). You are expected to learn from
your experience. People who go bankrupt again get a much tougher time.
In part ten, Nick Lord summaries the pros and cons of bankruptcy.
