In technical terms, bankruptcy is ‘a legal status of a person or organisation that cannot repay the debts it owes to creditors.’ To some, it is a term only referred to when you lose Monopoly. For others, it is an escape route from the debt burden they carry. Declaring yourself bankrupt can lessen the burden of debts, although there are many alternatives to bankruptcy available depending on your circumstances. In most cases, the state of bankruptcy is court ordered, normally instigated by the debtor who cannot pay off the debts. There are many misconceptions about bankruptcy however, which are detailed as follows:
It may be a way of relieving pressure from creditors, but it is not true that you will not have to pay your creditor if you go bankrupt. If you have any assets, such as in property, these may be sold in order to pay the creditor. Then there is a process of income assessment where a certain percentage of surplus living costs will also go to the creditor(s). This occurs over a period of three years.
There is also a fee of declaring yourself bankrupt, which not many people know about. It costs £460. This is a fee paid to cover court costs and the Official Receiver’s fee. This ‘bankruptcy fee’ can only be paid in cash.
Bankruptcy orders, as some think, are not kept a secret. Once you are declared bankrupt, it is a matter of public record. They are usually recorded in a local paper. In London, these orders are recorded in the London Gazette. The information is also recorded on the Individual Insolvency Register for three months.
Bankruptcy is not an easy way out of debt problems. Recent changes to bankruptcy law have seen reductions in the period of time one must stay bankrupt before being discharged, but bankruptcy will lead to a loss in all your assets. Also, in future borrowing transactions, you are likely to have to pay more as you are more of a risk to any lender, given your past state of bankruptcy.
Bankruptcy cannot be taken lightly. Not many people know enough about it, but the threats of declaring yourself bankrupt must be known. You do not get a fresh start in your job, your credit score will be damaged and trustees will claim any future assets you come in to in order to pay off creditors. Bankruptcy should not seen as ‘wiping the slate clean’, but a financial option to lessen the burden of troubling debt payments that can potentially damage your credit-worthiness in future transactions.
The option of bankruptcy is the best way forward for some people, but it is a decision that needs thorough research and individualised professional bankruptcy advice from a specialist organisation or charity.
