Being in a situation where you can no longer manage your finances is something which most people want to avoid at all costs.
But sadly in this difficult economy it is a situation that many families find themselves.
Suffering from bad debt management and ultimately having to go through bankruptcy is something which many feel ashamed about. Indeed, they almost see bankruptcy as a kind of branding which taints their good name forever more.
However, things really aren’t that bad. While bankruptcy is something you should do your utmost to avoid, it is often a fresh start for those whose financial burden has become too much to carry.
Bankruptcy can be initiated in one of two ways. The first is when you yourself apply to court to be made bankrupt and the second is when a creditor (the companies or people you owe money to) put in a petition for bankruptcy because you haven’t maintained your payments to them.
When you are made bankrupt, any assets or significant value (such as savings accounts, ISAs or expensive cars) may be sold for the benefit of your creditors.
This means that the Official Receiver or an appointed trustee can take possession of your non-essential items and sell them to raise the funds needed.
The biggest issue in this respect is the fact that your home could be lost. This will depend on who you own the property with and how much equity is in it.
If you run a business, it could also mean that it needs to be closed or sold. This could leave you with the even bigger problem of having to lay off members of staff.
The Official Receiver is also entitled to look at your earnings and decide if further payments should be made to your creditors. In this circumstance you will be asked to sign an ‘income payments agreement’ and be expected to make fixed monthly payments for a period of three years.
Typically, bankruptcy lasts for one year so if you are not party to the above repayment plan you will get the fresh start you craved.
However, this does not mean that you will be able to start running up debts again.
One of the things that many people fail to realise is the fact that despite bankruptcies being discharged after 12 months, the bankruptcy order will remain on file with credit reference agencies for a period of six years.
Even after that time has passed, lenders have the right to ask questions about your financial history and it could mean that being bankrupt at any time makes you in eligible to borrow money from them.
In particular this is the case when it comes to applying for a mortgage.
Other disadvantages of being made bankrupt include you not being able to act as a director of a company while the order remains in force. It is also likely to prevent you entering certain professions such as regulated financial roles, the police force, the armed forces and in local government.
Because of the obvious severity of being made bankrupt, it is always a prudent move to look for alternatives before applying to the court.
Indeed, you may well find that an Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO) are sufficient to help you through your difficult times
Depending on your circumstances these two options can help you take control of your finances and repay your creditors..
Before applying for bankruptcy it is advisable to discuss your situation with a debt adviser as they may be able to provide a solution which gets the same end result but minimises the damage bankruptcy would cause to your way of life and professional reputation.
It is also worth noting that the rules around bankruptcy differ in Scotland and Northern Ireland.
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