Bankruptcy can be a great way to deal with debts you can’t pay, but it also comes with some risks.
In this article, we’ll take a look at the pros and cons of bankruptcies in the UK, when they’re the right course of action, and when they should be avoided.
Let’s dive in.
If the court agrees to wipe out all of your major debt, bankruptcy can mean a clean slate and a new financial start. If the court doesn’t remove the entirety of a debt, the debtor is usually placed on repayment plans that they can afford. To give an idea of how much the average household debt is, it goes at £60,720 as of 2020.
Any bankruptcy process, from start to finish, usually only lasts around 12 months. During this period, debtors are required to make regular payments and may be placed under the financial control of the court, but they have a timeline and in most cases, enough time to improve their financial situation.
Filing for bankruptcy automatically stops all calls, letters, and emails from creditors. They can’t take any legal action against you or ask for payments during this period.
When an individual goes bankrupt, any legal action that has been taken against them is likely to be stopped or suspended, provided that it has to do with their debt.
If you live in a rented home and file for bankruptcy, you may be worried about whether or not you will have to find another place. Debtors are generally allowed to stay in their rented homes as long as they continue to make rent payments.
Most bankruptcies are individuals and don’t affect the family members or partners, including in civil partnerships. A partner or a family member can only be affected if any of the debtor’s debt is jointly held. In most cases, it’s highly advisable to sell all co-owned assets before filing for bankruptcy.
To apply for bankruptcy you need to pay a fee for the application and cover court proceedings, which cost around £680.
Debtors who file for bankruptcy can only be freed from debt if they have no income whatsoever. If they still have an income, they’ll have to pay a percentage of it to creditors every month until the debt is paid off.
If you don’t think that bankruptcy could help your financial situation, you can look into consolidation plans.
One of the greatest bankruptcy disadvantages is that you may lose your home. Once you file for bankruptcy, your trustee will take hold of any items of high value, including real estate, and use them to pay off your debt or a part of it.
The trustee can also take items you may need for work or everyday household items if they have a high value (like an expensive laptop), but they will have to provide you with alternatives.
When declaring bankruptcy, your financial information will be made available to anyone who wants to see it, including potential employers and landlords. Bankruptcies will affect your credit score and stay on your credit reports for a minimum of six years or until you’ve repaid creditors (if it takes longer).
Missing credit card payments can also negatively reflect your credit score, including where you don’t have the financial means to pay off your credit card debt.
Some industries, especially in the legal and financial sectors, refuse to employ people who have declared bankruptcy. Once you declare bankruptcy, you’ll no longer be able to work as an estate agent, member of Parliament, a trustee, or be on board of governors at places of education.
In the majority of bankruptcy cases, the court takes over the management of your assets and debts and puts restrictions on accessing and using your (and other) funds. For example, you might be prohibited from borrowing money or making large purchases for the duration of the bankruptcy.
Bankruptcy can be an effective way to get a fresh financial start, but it’s not the best course of action for every individual facing financial issues due to the fact that nearly 50% of British SMEs manage to avoid bankruptcy before their fifth birthday. The best way to determine whether it’s an appropriate option for you is to look at the pros and cons of bankruptcies in the UK and familiarise yourself with the law and potential consequences.