Bankruptcy is an insolvency solution which people experiencing large debt problems are encouraged to avoid at all costs. But for some, it might be the only solution they have.

What is Bankruptcy?

Bankruptcy is an option mainly used for those for whom other methods of controlling debt – such as debt consolidation, debt management plans, Individual Voluntary Arrangements or Debt Relief Orders – are insufficient. Personal bankruptcy is a form of debt management but at a level where a person has no realistic hope of repaying the money they owe.

How to Go Bankrupt

The High Court can declare a person bankrupt by issuing a bankruptcy order. This legal status usually lasts for one year during which assets such as property and valuable possessions are used to pay off creditors who are owed money. At the end of this term, a discharged bankrupt will have their debts taken away from them forever.

Declaring Yourself Bankrupt

Alternatively, a person can themselves file for voluntary bankruptcy. Debtors can go about declaring bankruptcy by filling in the relevant bankruptcy forms issued by a county court. Numerous bankruptcy costs are involved when filing for bankruptcy which is why this option should always be a last resort. Individuals will usually be liable for paying their own bankruptcy administration fees and any court fees which will total – at time of writing – around £700 or more, so speaking to a bankruptcy advice specialist is always recommended before even considering filling in a bankruptcy form.

The Bankruptcy Register

However a borrower is made bankrupt, details of their bankruptcy will be made public on the official bankruptcy register. This bankruptcy list can be used to look up the names and addresses of individuals with either current bankruptcies or those which ended in the last three months.

Disadvantages of Bankruptcy

Though bankruptcy can allow a person to start their finances from scratch, this option can still be a great burden in the long run. Discharged bankrupts may have lost their homes if they were required to release any equity on their property to repay their debts. Bankruptcy will also stay on a person’s credit report for six years, making it extremely difficult to obtain consumer credit in the future due to heavy penalties to their credit rating: this applies not only to standard credit products, but also products like car insurance, mobile phone contracts and the like. Loans and credit cards for bankrupts do exist but borrowers are warned that interest charges can be extortionate given the risks each potential lender will face. As a person’s bank accounts will be frozen and possibly closed upon filing for bankruptcy, a similar product will equally be as hard to find without having to pay to open one. A free bankrupt bank account can be obtained from a minority of lenders (certain banks and building societies) though bankrupt bank accounts are only basic as no overdrafts will be offered and debit card facilities are limited. Mortgages, on the other hand, are very difficult to obtain for those that have been bankrupt.

Alternatives to Bankruptcy

Alternatives to bankruptcy should always be considered where possible. Debt relief orders are essentially mini bankruptcy products (indeed, they are sometimes referred to as mini bankruptcies) where a person can clear their debts under £15,000 after 12 months of the order being imposed and for a fraction of the cost of bankruptcy. Individual voluntary arrangements are also preferable options in which a debtor can negotiate reasonable repayment terms with their lenders.

If bankruptcy appears to be the only suitable route available, it is important to seek bankruptcy help from trained advisers. Numerous agencies can give trustworthy and impartial bankruptcy information and general free debt advice before their customers make a decision they could live to regret.