What is Bankruptcy?

Bankruptcy and its affect on your personal finances explained.

What is Bankruptcy and How Does it Affect Your Personal Finances?

Bankruptcy is not a place anyone wants to end up in. But the reality is, especially with personal finances so stretched in the current climate, lots of people do find themselves in a position where they struggle to pay their debts.

If that’s you and you are in the scary position of facing threats from debt collectors and court orders, bankruptcy could be your best option. It comes with consequences. But when you have little or no prospect of paying off what you owe, bankruptcy clears your debts and protects you from legal action.

With that in mind, if you do find yourself struggling with debt, it is well worth knowing what exactly bankruptcy is, what it entails, and what long-term impact it has on your personal finances.

What is bankruptcy?

In the UK, bankruptcy is a legal process designed to give individuals who are unable to repay their debts relief from their financial obligations and protection from enforcement action by creditors. 

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What happens when you file for bankruptcy?

If you do decide bankruptcy is the only way forward, filing for bankruptcy involves several steps. First you have to make a court application to the court, providing full details of your income, expenses, debts, and assets. You also have to pay a fee of £680, which must be paid at the time of filing.

Once the application is submitted and approved, the court will issue a bankruptcy order, which is a legal document that confirms bankruptcy status. At this point, all of your assets are frozen and become the legal responsibility of a trustee who is appointed to manage the bankruptcy estate. You can no longer access your own bank account or earnings, and must accept whatever funds the trustee grants you to live on. The trustee also has the power to sell your assets, including property, in order to pay off your debts.

In return, all actions from your creditors to try to recover your debts are suspended and the trustee will handle communications with your creditors on your behalf. Most significantly, once the trustee decides that they have obtained all the value they can from your liable assets to pay back your creditors, the remaining balance of all debts is written off.


How long does bankruptcy take?

This process can be completed in as little as 12 months. Although, if your circumstances improve during the course of the bankruptcy period (for example, you get a better paid job), you may be required to continue making payments to creditors at an agreed rate for up to three years.

Can a Director be make bankrupt if a business closes?

Usually, no. As a Director of a limited company, you don't owe the company debts personally.

The only time a Director may be made bankrupt from a liquidated company is if they owed the company money through Directors Loans, Preference Payments or Misfeasance. This is because the Liquidator will pursue the Director for these funds.

If you need advice and support around this, speak to our team for free and confidential guidance.

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How does bankruptcy impact your finances?

Bankruptcy and personal credit

Filing for bankruptcy is a serious decision that can have a significant impact on your personal finances, especially with regards to your credit rating and ability to obtain credit. In short, having bankruptcy on your credit report will put most lenders off giving you any sort of credit. And those that do, you will have to pay a premium in the form of higher interest rates. This applies to:

  • mortgages
  • credit cards
  • personal loans

Bankruptcy will appear on your records for a minimum of six years.

Bankruptcy and employment

Depending on your profession, bankruptcy can have implications for employment and business opportunities. Certain professions, such as law and accountancy, require individuals to have a clean financial record. You are not allowed to take a post as director of a company until discharged from bankruptcy.

Bankruptcy and rent

Finally, as well as making it harder to obtain a mortgage to buy a home, bankruptcy may make it harder to rent a property. Most landlords conduct credit checks before offering a tenancy.


Should I file for bankruptcy?

In conclusion, bankruptcy provides valuable legal protection from debt enforcement and can lead to unmanageable debts being cleared.

However, it should only be considered as a last resort if you have no realistic prospect of repaying off your debts by any other means. Bankruptcy can negatively affect your credit rating, employment and business opportunities, and your ability to rent or buy a home. 

"Individuals considering bankruptcy should seek professional advice before making a decision to ensure they understand the full implications and consequences of the process." Jonathan Cooper, Founder and Director
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