Bankruptcy Not A Quick Fix To Personal Debt

For people with no realistic chance of repaying their debts, bankruptcy may seem to be the only viable options to get out of debt. In fact some people will rack up huge sums of debt with no intention of ever paying back their debt with the sole intention of going bankrupt. They may see the debt they create as ‘free money’ and abuse the bankruptcy system to get out of paying it back.

The reality is that bankruptcy isn’t an easy fix and should be considered lightly. If you care about your credit rating and prefer not to have any restrictions on your spending then bankruptcy will affect you. Yes, bankruptcy will eliminate your unsecured debts though that isn’t the whole story. There are numerous restrictions placed on yourself should you go bankrupt which may or may not have an affect on you.

There are 2 main types of bankruptcy in the UK

1) A Debt Relief Order (DRO) was introduced in 2009 and is suitable for people with debts under £15,000 and a low income. This is a preferred form of bankruptcy as the restrictions from a DRO are not as harsh as that of normal bankruptcy. Sounds great, however, this type of bankruptcy is very difficult to qualify for as the criteria on a DRO is very strict. In order to qualify you must not have any savings over £300, a motor vehicle worth over £1,000 and a disposable income of less than £50. A DRO can cost as little as £90.

2) Bankruptcy is the form of bankruptcy most of us in the UK will be more familiar with. It will erase most if not all your unsecured debts and will prevent your unsecured creditors from chasing payments from you. Provided you have exhausted all other available debt options such as an IVA, Debt Management or a DRO then bankruptcy can be considered. The reason why bankruptcy should be considered as a last resort is down to the qualifying criteria and the restrictions imposed which we shall go into in more detail.

Bankruptcy Qualifying Criteria

It is always advised to speak to a professional debt advisor before jumping into bankruptcy. A debt or bankruptcy advisor will first consider all your options once details about your debts and financial incomings and outgoings have been factored in. If you have significant debts (over £5,000) and have little or no disposable income (money available to service your debts) then bankruptcy may be considered as an option. Most debt company’s will see whether debt management, an IVA or a DRO can help you out first as these solutions have less consequences on your financial future than bankruptcy. Any property you own will be taken into account to see if there is any equity available that can be released to help pay off your debts. If you have a sizeable amount of equity in your property and don’t want it touching then bankruptcy may not be an ideal solution.

Bankruptcy Restrictions

Once you go bankrupt you will have the following restrictions imposed on you as set out by insolvency law

• You must not obtain credit of £500 or more
• You must disclose to those you wish to do business with the name or trading style under which you were made bankrupt
• You must not as a company director or be part of the management.
• You must not act as an insolvency practitioner
• A payment order may be forced for those with a disposable income
• Your credit rating will be severely affected making future borrowing difficult to obtain
• Your current position may not allow you to go bankrupt

Bankruptcy can be financially and emotionally draining and can have an impact on your life for many years after though it can be seen as the only way out of your debt troubles. Regardless of whether you have chosen a DRO or Bankruptcy, future loan applications will ask you if you have ever been bankruptcy before. Even insurance quotes now ask if you have ever been bankrupt. Bankruptcy will remain on your credit file for approximately 6 years after you declared bankruptcy and will be visible each time you make an application for credit.

Provided bankruptcy is treated and considered in the correct manner, it can be a good way out of debt. It is also a deterrent from obtaining any future debt and should help prevent a debtor to live within their means. It must be said that the majority who do go bankrupt, only go bankrupt once and learn from their mistakes. The process and bankruptcy restrictions is intended to bring a change in lifestyle for many which will encourage them to control their spending habits and live a debt free life.

Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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