What exactly is bankruptcy?

The word “bankruptcy” has an ominous ring to it– but it shouldn’t really. To those deeply in debt, it can come as a quite welcome relief.

Bankruptcy is seen as a last resort because it affects your credit rating and ability to gain loans in the future—but for those badly in debt, not taking on any new debt may be the best choice. Companies and partnerships involved in business can also go bankrupt.

Bankruptcy can give you a fresh start, free from debt. You can sometimes gain a discharge in one year, less in many cases. If the Official Receiver of the court believes that you can make payments you may be required to pay for three years before discharge. Your creditors will divide your assets fairly amongst themselves. You can declare yourself bankrupt or a creditor can do it on your behalf if they are owed at least a £750 debt. If you dispute a creditor’s bankruptcy petition against you, settle the case prior to the issuance of the bankruptcy order, or it will be more expensive and difficult to broker a settlement.

A full investigation of your financial affairs can be carried out by the court as part of the proceeding. By cooperating with the Official Receiver or trustee of your case, things can go smoothly and you will most likely be automatically discharged within a year.

So, what are the consequences of bankruptcy? You could lose some of your assets, you cannot serve as the director in a company, you cannot start a limited company without court permission, you must inform business associates of your bankruptcy, and you cannot become a Chartered Accountant or Lawyer, Member of Parliament, member of a local authority, or a justice of the peace. To gain credit lines over £250, you’ll have to have special permission from the lender.

The bankruptcy petition will be advertised in the London Gazette and your local paper. Your bank, landlord and any others financially connected to you will be notified. When notified of the bankruptcy, banks may close accounts. Assets acquired during the term of the bankruptcy, such as inheritances, will be signed over to pay creditors.

Many people are under the impression that household items will be taken and sold to raise money for the debt, but in the majority of cases this is untrue. Only household items of large value that will be able to settle the debt would be seized.

After the discharge, all of these freedoms are restored back to you although your assets may still remain in the care of the trustee if they have not yet been dealt with.