Bankruptcy is an option you can consider if you are insolvent i.e. you have debts which you can not possibly repay. People often think that Bankruptcy is something that companies and businesses go through when they run into trouble. In fact, this is not correct. The Bankruptcy procedure is actually used for dealing with individual people’s personal debts.
At first, the idea of Bankruptcy seems extremely negative and something that should be avoided at all costs. There are of course some serious downsides to Bankruptcy. However, for some people it can be the best solution for resolving overwhelming debt problems.
If you are declared Bankrupt, the responsibility for repaying your debts will be taken away from you by the Court. You are protected by law from any further creditor action against you. For example, your creditors are no longer allowed to contact you and demand repayment of money. They are not allowed to add further interest or charges and can not take any further action against you in the Court to recover money they have lost.
You are usually Bankrupt for only twelve months, during which time you are subject to various restrictions: you cannot take out a mortgage, be a company director, often take a position in the police force or military, or be employed in various professional positions.
Is Bankruptcy Right for Me?
Your ‘Bankruptcy Order’ may be accompanied by an ‘Income Payment Order’, meaning that if you can afford to do so, you will have to make payments to the court over a period of 3 years. During that time, you will be unable to save money or enjoy an expensive lifestyle.
Most importantly, if you go Bankrupt you will lose control of your assets – your house may be at risk if there is equity in it (although it may not be physically repossessed for 12 months), and so will your car if it is worth more than £2500. These assets will be seized by the court and shared between your creditors.
What happens to my Assets?
Once your Bankruptcy has finished you will be discharged. This means that you are no longer a Bankrupt person. After you are discharged, any outstanding debt which is still owed to your creditors is written off by the Court. This means that you can continue on with your life, debt free.
The History of Bankruptcy
The Bankruptcy Act was first instituted in 1571. Originally, only traders and craftsmen could be declared Bankrupt; everyone else would be imprisoned if they didn’t pay their debts. As you would imagine, this meant that everyone in financial difficulties tried to qualify as traders in order to avoid the debtors’ prison! This situation was revised in 1861, when all insolvent debtors were allowed to petition for Bankruptcy. This arrangement has been standing ever since, meaning that today anyone in a position of insolvency can declare themselves Bankrupt.
In April 2004 a number of changes were made to Bankruptcy law in the much-publicised ‘Enterprise Act’. One effect of this was that the duration of Bankruptcy has been reduced. Prior to the amendments, Bankrupts would be discharged after two or three years; now they are discharged after only twelve months. In addition, the time allowed for the Court to realise assets for creditors has now been limited to 3 years.
Bankruptcy can be forced upon you by creditors who are owed a minimum of £750, if you have repeatedly defaulted on your payments to them. It can also be forced upon you if you undertake an IVA and then fail to make the monthly payments. However, you can also choose to declare yourself Bankrupt voluntarily, which many people feel allows them a certain degree of dignity.
Who Will Deal With Your Case?
When you declare Bankruptcy, an Official Receiver is appointed by the Court. The Official Receiver has responsibility for administering your Bankruptcy. He or she is responsible for deciding what will happen to any assets you have and whether you will be asked to make monthly payments towards your debt in the form of an Income Payment Order. The Official Receiver is also responsible for looking into your financial affairs for the period before your Bankruptcy.
The Official Receiver will give notice of your Bankruptcy to local authorities, utility suppliers, the Land Registry and any relevant professional bodies. Enquires will also be made of banks, building societies, mortgage, pension and insurance companies, landlords and any other persons and organisations who may be able to provide details of any assets or liabilities that you have or have had.
How Long Will Bankruptcy Last?
With the introduction of the Enterprise Act into the Law in April 2004, your Bankruptcy will normally last 12 months. It will normally only last longer than this if you have been Bankrupt before or there are other special circumstances In fact, the Official Receiver may decide that your Bankruptcy should be even less than 12 months if your main income is State Benefit or a Pension or if your debts have been fully paid after the sale of any assets.
At the end of your Bankruptcy, you will be discharged. This means that you are no longer a Bankrupt person and you can continue with your life free from Bankruptcy restrictions. Any debt that remains unpaid will be written off by the Court (although there are a few exceptions: fines, Student Loans taken after 1998 and debts arising from fraud and certain other crimes).
If you have been asked by the Court to make monthly payments towards your debts (an Income Payment Order) this will normally continue even after your discharge for up to 3 years from the date of your Bankruptcy.
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