What Are the Pros and Cons of Declaring Bankruptcy?
Bankruptcy is a legal financial process that can be brought against individuals who are no longer able to pay their debts. Bankruptcy must be brought about by court order, and it can have important implications (both short and long term) for the individual affected.
Bankruptcy can be an effective way to wipe your debts clean and have the opportunity for a fresh financial start, but for many individuals it’s not always the most appropriate course of action to take if they’re facing financial difficulties.
In this article we ask the insolvency experts at Irwin Insolvency to explain what bankruptcy is, and what the pros and cons of it are. Read on to discover if bankruptcy really is the best choice for you.
What Happens If I Declare Bankruptcy?
Before we delve into the pros and cons of bankruptcy, it’s important to clarify what it actually is. There are common misconceptions surrounding bankruptcy, in part due to the fact that bankruptcy in the United Kingdom is different from bankruptcy in the United States.
In the UK, bankruptcy is a legal process that can only be authorised by court, and it can only be applied to individuals, not businesses or companies. Bankruptcy is brought about when an individual is in financial trouble and can no longer pay their bills.
An individual can file for bankruptcy themselves or it can be involuntarily brought about by a creditor looking to reclaim the money they’re owed through the courts. As a legal process, there are obviously serious repercussions for an individual to consider before they declare bankruptcy.
Bankruptcy is different from insolvency. Insolvency is a state of being, rather than a legal process. An individual that can no longer pay their bills is in a state of insolvency. They only become bankrupt when the court recognises this fact.
In the US things are slightly different because companies can be declared bankrupt, whereas in the UK they can only be declared insolvent.
If you decide to file for bankruptcy in the UK, there are a number of implications to consider.
Pros of Declaring Bankruptcy
So what are the benefits of an individual declaring bankruptcy? Bankruptcy is often seen as being a fresh start, because in many cases individuals are freed of their major debts. Creditors can’t legally chase payments, and once the bankruptcy period is over you’re free to start afresh.
Let’s take a look at the pros of declaring bankruptcy in more detail.
A Fresh Financial Start
Bankruptcy can be a fresh financial start, assuming the court agrees to wipe out your major debts. Often, debtors are placed onto more amenable repayment plans, even if their entire debt can’t be wiped out. But after a set period of time they’ll be freed from this repayment plan, too.
Bankruptcy Only Lasts 12 Months
Bankruptcy only lasts for a period of 12 months. This is a time during which you may need to make regular, monthly repayments, or be placed under the financial control of the courts or a financial minder. After 12 months you’re free again and, in the grand scheme of things, one year isn’t such a long time.
No More Harassment and Legal Threats
Once you’ve filed for bankruptcy, you’re protected against any further harassment from your creditors. They’re legally bound to leave you alone, so no more invoices, emails or phone calls to deal with.
Creditors are also halted from taking any further legal action against you. They can’t send bailiffs around to your home, and they can’t try to recover the debt.
Keep Your Income and Many Personal Possessions
If you’re employed while declaring bankruptcy or have any form of income, you don’t necessarily lose all of this. Any repayments you have to make towards your debt are always income-dependent, so you only pay what you’re deemed able to lose.
Contrary to popular belief, you don’t automatically lose all of your possessions, either. Again, this depends on what you own, but ordinarily it’s only high-value items that are taken to repay your debt.
Family and Partners Are Not Affected by Your Bankruptcy
Importantly your family and friends won’t be affected by your bankruptcy, provided your debts are yours alone. For many, this can be a way to save the home if ownership is transferred to a partner before bankruptcy is filed.
Cons of Declaring Bankruptcy
If you’re simply looking at the positives of bankruptcy, then it almost seems too good to be true. The reality is that it often is, and individuals need to seriously weigh up the potential negatives before declaring bankruptcy.
Bankruptcy might give you a fresh financial start, but you stand to lose high-value possessions such as your car or even your family home. It’s also a public matter, and you can struggle to gain credit for many years.
It’s important to weigh up the pros and cons, and to remember that there are other alternatives to bankruptcy, too. Speak to a professional insolvency practitioner for more detailed information, as every individual is in a different situation.
Let’s take a look at the most important cons of declaring bankruptcy.
Bankruptcy Costs Money
It might seem strange, but to declare bankruptcy you still need money to make the filing. Court orders for bankruptcy proceedings cost £680, which for a person facing bankruptcy can be a large sum of money.
Debt Repayments Are Dependent on Personal Income
It’s a bit of a myth that you are completely freed of all debt, because this is dependent on your income. If you have no income you make no payments, but if you do have an income you pay a percentage of that to your creditors each month. This isn’t likely to be in your favour, and often there are better consolidation plans to consider before filing for bankruptcy.
Not All Debts Are Cancelled
Likewise, not all of your debts can be automatically cancelled, even after the 12-month bankruptcy period. Only major personal debts are cancelled which, while beneficial, still leaves you with many other debts to continue paying.
Debts that can’t be cancelled include money owed to HMRC in taxes, student loan repayments, court fines, and any maintenance and child support money that could be owed.
You Might Lose Your Home
You won’t lose all of your possessions, but if you own a home there’s a high probability it will be repossessed and sold off to pay your debts.
If you rent a property you have to declare your bankruptcy to your landlord, and if you can’t pay the rent they’re likely to evict you.
You Might Lose Your Business
If you own a business, this could also be taken away from you in order to pay your creditors. Parts of the business or high-value business assets may need to be sold off, and in severe cases the entire business can be lost.
Credit Rating Is Severely Affected
While bankruptcy ends after 12 months, you have to declare your bankruptcy for a number of years afterwards. This makes it difficult to secure future loans or lines of credit, although not impossible. You’ll need bigger guarantees and will pay more interest.
Bankruptcy Is a Public Process
Bankruptcy is a public process, and for some this can be career ending. Bankruptcy is noted in the public record and for certain professions, such as lawyers, it can result in a loss of qualifications and licences.
Alternatives to Bankruptcy
While bankruptcy is good for individuals in severe debt who have little left to lose, for home and business owners the negatives of bankruptcy can seriously outweigh the positives.
If you’re in personal financial trouble, there are several other avenues that can be explored before filing for bankruptcy. Often, these methods can help you out of insolvency without the need to lose everything in the process.
Three major alternatives to bankruptcy are:
– Administration orders
If you owe less than £5,000, then a court-issued administration order gives you a way to pay back the money over time to your creditors.
– Debt consolidation loans
Your bank can help you to organise a debt consolidation loan that consolidates all of your debts under one larger repayment plan. This makes your debt more manageable, while interest rates and payment plans can be reorganised.
– Individual voluntary arrangements
An IVA is an agreement between an individual and their creditors that sets new repayments terms and interest rates.
Everyone’s individual circumstances vary, so it’s important to consult an insolvency practitioner for the best advice before making financial decisions.
Contact Irwin Insolvency Today for Your Free Consultation
With decades of experience offering businesses and individuals across the UK advice on insolvency and bankruptcy, our licensed insolvency practitioners offer impartial expertise that can help you through tough financial times.
If you’re weighing up the pros and cons of declaring personal bankruptcy, don’t hesitate to contact Irwin Insolvency for your free, no-obligation consultation.