Bankruptcy Pros & Cons

Expert Legal Advice can help you with any bankruptcy questions or queries that you have whether it is regarding personal bankruptcy, or commercial bankruptcy, otherwise known as insolvency.

This article deals with the basic considerations of personal bankruptcy. Expert Legal Advice advises that if you do decide to declare yourself bankrupt, there will be serious implications. Despite from being heart wrenchingly difficult on a personal scale, it might also be one of the most beneficial things you have done in terms of accepting a situation and moving on – albeit slowly.

There is more to bankruptcy than putting an end to harassing debt collectors and nagging creditors. One big side effect of bankruptcy being that your life is likely to be subjected to microscopic inspection.

What is bankruptcy?

Bankruptcy is a way of dealing with debts you cannot pay. It is not the only way. Very simply, bankruptcy proceedings:

• free you from overwhelming debts so you can make a fresh start, subject to some restrictions; and
• make sure your assets are shared out fairly among your creditors.

Anyone can go bankrupt, including individual members of a partnership. There are, however, different insolvency procedures for dealing with companies and for partnerships themselves.

Here are some advantages for you to consider. Declaring yourself bankrupt:

·        removes the uncertainty and stress caused by dealing with numerous creditors;

·        allows you to take a step back. Once an order is made, a third party takes over the administration, decision making and payment process of the debts;

·        can be better value than an Individual Voluntary Agreement (IVA) - debtors typically pay less with a bankruptcy order than with an IVA;

·        forces creditors to recognise that they must accept less money than is owed;

·        gives you certainty in that creditors cannot change their minds and that once in place creditors seldom take little interest in the debt;

·        discharges many debts – they are simply written off and creditors cannot pursue them. Some debts, such as Student Loans Company debts, are not included in bankruptcy. For those debts the bankrupt will continue to owe them even once they have completed their period of bankruptcy and have been discharged.

And some major disadvantages:

·        The debtor will lose all assets of value. Though they may not be sold until immediately and, perhaps, not even until after the bankrupt has been discharged. This might include equity in a home, a business and other assets.

·        Employees from the business will be dismissed. They will most likely claim a redundancy payment which will be paid for by the government, who will in turn require that you pay this amount back in your debt payment.

·        Should the debtor live in rented accommodation and have rent arrears, this could put the home at risk if the landlord considers those arrears are unlikely to be paid. In this case he could commence possession action. Also, some tenancy agreements contain a clause stating that an undischarged bankrupt cannot be a tenant.

·        Bank current accounts can be difficult to obtain, though there are some very basic accounts offered by a limited number of banks and building societies.

·        It can ultimately be very expensive. All fees for the insolvency service, courts and any trustee are taken out of the debtor's assets. There is a 15% levy on all sums received by the Official Receiver/trustee.

·        If you are trying to obtain credit of more than £500 (including ordering goods and then not paying for them on delivery) the debtor must disclose his status as an undischarged bankrupt.

·        The debtor must allow all his financial affairs to be scrutinised, and can face criminal charges if irregularities are found.

·        You cannot hold certain public offices, such as MP, councillor or magistrate, or practice certain professions, such as solicitor and accountant. You may not be able to hold office as a trustee of a charity or a pension fund. Nor can a bankrupt be a company director or trade under any other name than the one used ay the time of bankruptcy.

·        Names of those made bankrupt are published in the London Gazette and the local press and can be viewed online at the Insolvency Service website, making them accessible to anyone in the world.

·        The trustee must be informed of any changes in circumstances during the bankruptcy. Once discharged from bankruptcy, the debtor's assets may still be adminsitered by the trustee/Official Receiver.

·        Certain debts cannot be written off: fines, maintenance/child support payments, other family court orders, debts to secured creditors, debts from personal injury claims, debts incurred through fraud, debt arising from certain other orders of the criminal court.

·        Bankruptcy does not affect the rights of secured creditors. Where there are joint debts, creditors can still pursue the non-bankrupt debtor.

·        Bankrupts found to be blameworthy, culpable or dishonest can be made subject to a Bankruptcy Restrictions Order which can impose the same bankruptcy restrictions, plus some additional ones, for anywhere from 2 to 15 years.

So if you have decided bankruptcy is not for you, why don’t you try some of these alternatives suggested by Expert Legal Advice?

An informal arrangement or "family arrangement"

If you know that you cannot pay all your debts, you could consider writing to your individual creditors to see if you can reach some compromise. Include a timetable of when you will repay them. The disadvantage with an informal arrangement is that it is not legally binding so your creditors could ignore it later and ask you to pay in full. Expert Legal Advice can answer all of your queries on this. We can help you to write appropriate and persuasive letters, guide you on what to say to the organisations you need to deal with and help you to follow up to ensure that there is minimal possibility of them asking you for the money later.

Administration orders

If one or more of your creditors has obtained a court judgment against you, the county court may make an administration order. Administration is a court-based procedure whereby you make regular payments to the court to pay towards what you owe your creditors.

Your total debts must not be more than £5,000 and you will need enough regular income to make weekly or monthly repayments. You do not have to pay a fee for an administration order but the court will take a small percentage from the money you pay towards its costs. If you do not pay regularly, the order could be cancelled and you may become subject to the same restrictions as someone who is bankrupt.

If your circumstances change and you cannot pay as ordered, you can apply to the court to change the order. The court which made the order will tell you what to do. Details of administration orders are available at your local county court.

Individual voluntary arrangements (IVAs)

This is a formal version of the “family arrangement”. An individual voluntary arrangement begins with a formal proposal to your creditors to pay part or all of your debts. You need to apply to the court to do this. Any agreement reached with your creditors will be binding on them.

When can you make an individual voluntary arrangement?

It is better and cheaper for you to set up an individual voluntary arrangement before you become bankrupt but you can propose one afterwards. If you do propose an individual voluntary arrangement after bankruptcy, it is possible for you to nominate the Official Receiver to be the supervisor of the arrangement.

Are there any restrictions?

Generally speaking no, but the court cannot make an interim order if you have applied for one in the previous 12 months. There is no maximum or minimum level of debt and no maximum or minimum level of repayments, except what is acceptable to your creditors. An arrangement might particularly suit you if:

      -           you have friends or relatives prepared to help pay or contribute towards paying your debts;

      -           your income enables you to pay regular sums to creditors.

What are the advantages of an individual voluntary arrangement compared to going bankrupt? 

• It gives you more say in how your assets are dealt with and how payments are made to creditors. You may be able to persuade your creditors to allow you to retain certain assets (such as your home). You will obviously have to act responsibly and flexibly in order to reach agreement with your creditors.
• You avoid the restrictions which apply to a bankrupt (see section 10).
• Because you will not have to pay some of the fees and expenses which are charged in a bankruptcy, the overall costs are likely to be less

Can an individual voluntary arrangement be proposed by a member of a partnership?

Yes. You can propose an individual voluntary arrangement on your own which must take into account the claims that the creditors of the partnership have against you personally. It will not affect the rights of the partnership creditors to take action against the partnership itself or against any other partner.

Warning: If you enter a voluntary arrangement but fail to give full details of your assets and debts or fail to do what you have agreed under the arrangement, then the insolvency practitioner, or any creditor bound by it, may still petition for your bankruptcy