How To Decide If Bankruptcy Is Right For You

by David Redmond on 20 Aug, 2012

With the UK back in recession and austerity measures affecting homes up and down the country, many individuals are struggling to find enough money to pay all their bills.

But when does scrimping and saving become more serious than simply tightening your belt? There comes a point when it is more sensible to hold your hands up and admit you can no longer carry on trying to cope.

The news has been full of celebrity bankruptcies in recent months, with A, B and even Z-list footballers and entertainers forced into making a public admission of unmanageable debt. But with many seeming to be able to carry on a luxury lifestyle, it can be tempting to think that Bankruptcy is the answer.

There is no denying that for some individuals in serious financial crisis, Bankruptcy offers a welcome release from the stress and anxiety of trying to struggle on in a situation which is impossible. However, Bankruptcy comes with potentially severe consequences and should only ever be considered a last resort. For many people, there are other debt solutions which could offer a means of escape from the worry without the long term repercussions.

Deciding whether Bankruptcy is right solution for you is a huge decision so it’s important to have a good understanding of the key facts before proceeding.

Rather ironically, declaring yourself bankrupt isn’t cheap. The current total cost for the 2012/2013 tax year is £700 of which £525 is paid to the Official Receiver and the remaining £175 goes to the courts. Some individuals in receipt of benefits or on a low income may qualify to have their court fees reduced to zero, leaving them with a bill of just £525.

If you cannot afford to declare yourself bankrupt, you could wait to see if a creditor is willing to lodge a petition on your behalf. Normally the company will absorb the Bankruptcy charges, so it will not cost you anything, but obviously this removes some of your control from the situation for you.

Bankruptcy usually lasts for 12 months and during this time certain restrictions apply. For example, you cannot set up your own firm or act as a company director and you must tell anyone you do business with that you are currently bankrupt. If you want to apply for credit of more than £500, you are also legally obliged to tell the lender about your Bankruptcy. If the Official Receiver or Trustee do not believe that you have complied with the terms of your Bankruptcy, they can ask the courts to extend the Bankruptcy restrictions. This means that even though you could be discharged after one year, you will still be subject to the same restrictions.

It is also worth mentioning that whilst most people will find their Bankruptcy does not affect their jobs, anyone working in a position of responsibility or within financial services, may find that becoming bankrupt means they can no longer keep their job.

You will be expected to make a full and honest disclosure about your finances to the Official Receiver to enable a decision to be reached about what you can afford to repay. Any assets you have – including your home – could potentially be seized to raise funds. If you have children, you still face losing your home, but could be given a bit longer to find suitable alternative accommodation.

Even though you could be discharged from Bankruptcy after 12 months to start afresh, you could be ordered to pay a monthly sum for up to three years towards your debts.

However, although Bankruptcy has a very significant effect on your credit file for the medium to long term, there are some advantages.

As Bankruptcy is a legally recognised position, lenders are not permitted to chase you for more money, which will help to greatly reduce the stress caused by debts. All the debt payments will be organised by the court officials, leaving you free to focus on rebuilding your life. And after 12 months you will have the relief of knowing you are free from the debts included in the Bankruptcy Order.

Baines and Ernst – one of the UK’s leading debt solutions companies offers help and advice on going bankrupt, as well as information on alternative debt solutions that could help you get out of tough financial situations including Debt Management Plans, IVAs and Debt Relief Orders.

For some people Bankruptcy is their only way out of financial difficulty, but only you can decide whether it is the right thing to do for your situation. Make sure you have all the facts and have thought about whether there is anything else that could provide the same peace of mind without the long-term consequences.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.