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Bankruptcy

The number of people in the UK having debt problems has been on the increase for a number of years, and figures for those who are filing for insolvency as a last resort show a pronounced rise during the last year. Around twelve thousand people declared themselves bankrupt in the third quarter of 2005, a step that should definitely only be taken as a last resort.

Filing for bankruptcy has traditionally been something that is undertaken by failing businesses, however as the public has become more accustomed to consumer debt, the number of individuals filing has been on the increase as more and more people overstretch with credit in various forms. If you are finding meeting your creditors demands an impossibility and are considering the bankruptcy route, then you need to think carefully – this is by no means an easy way out, and it does carry a number of consequences.

A common misconception regarding bankruptcy is that once declared you simply walk away from your debts, this is far from the truth. Every effort will be made to repay your creditors the money owed, and your assets will be sold in order to do so if necessary. This means that you are putting your home at risk, even if it is under joint names with your partner, the sale can be forced and your half of the proceeds can be used to pay the debts. If you are thinking ‘well I’ll just give the house to my partner, or sell it to them for £1 before I start the bankruptcy proceedings..’ then think again – your history will be checked to see if there have been any significant gifts made in the previous five years, or any undervalued sales were made, if so the trustee can make claim to these.

Bankruptcy does have its uses, but it really should be viewed as a last resort. The process will almost certainly mean the loss of any assets of value, if a business is owned then this too would be sold, and once complete there will be restrictions placed on your future. Undischarged bankrupts must declare their status when applying for any credit over £500, which can obviously cause problems in obtaining such credit. The period of bankruptcy lasts for twelve months, after which the person is know as a discharged bankrupt, which itself can cause problems in getting credit, opening regular current accounts.

A better option in many cases is to pursue an individual voluntary agreement (IVA), this is an agreement between the debtor (the person owing the money) and their creditors to repay a percentage of the outstanding money over a set period of time, typically five years. With an IVA, your home is at significantly less risk of forced sale than with bankruptcy, which alone is a good reason to pursue this route. As the debtor is the one who initiates the IVA, and the creditors are assured regular payments, they are generally more flexible to leaving fixed assets alone, instead savings and reliable assets are taken into consideration. Fixed assets may be liquidated, but this usually only happens at the end of the agreement period if required.

The whole IVA process is overseen by an insolvency practitioner, and they will liase with the creditors in order to put the agreement in place, of course the practitioner does charge for their services so you need to take this into account. Before an IVA can be put in place the creditors need to agree to it, which in most cases they will as it’s generally a safe way for them to recoup most of their money and they can still write off the bad debt for tax purposes in the same way as when dealing with someone becoming bankrupt. If you have multiple creditors then even those who do not agree to it are bound by the IVA as long as over half the creditors do agree, and that the sum they command is at least 75% of the total debt.

Taking the IVA approach is better in many ways than opting for bankruptcy as it places fewer penalties on the debtor and may not require the sale of the home, also the person will still be free to be a director of a company which may be important. The IVA will be recorded in the persons credit record and so it will still have an effect on their future ability to obtain credit, but it is preferable to being a discharged bankrupt.