Bankruptcy – it’s not the easy way out that some people think
By Mr Bankruptcy
15th November 2024
A few years ago you, couldn’t switch on the television without seeing a TV money guru urging some young person or family to get a grip on their spending and control their spiralling debts.
The subject of the programme would be young men and women in modestly paid jobs living well beyond their means, eating out and socialising every night because their friends were important to them.
But every month, they would only pay the minimum interest off their credit and store cards, not realising that the principal debt was rising higher and higher until they owed tens of thousands of pounds.
Then the youth person would just say: “No worries, I can just go bankrupt and get rid of all my debts.”
There was definitely an idea among young ‘anti-capitalists’ in the recent past, possibly before the reality of hard times kicked in, that they could ‘stick it to the system’ by racking up debts and then walking away.
Ironically, bankruptcy as an idea is, in my view, one of the biggest contributors the Victorians made to the capitalist system, boost entrepreneurialism by taking away the threat of prison if their business ideas failed.
I’m not having a go at young people here. No-one gets much of an education about finances and credit before they leave school into a world that’s trying to get them into debt. It’s a complicated subject, which is why debt and bankruptcy advisors exist.
But if the consequences of bankruptcy were better explained to individuals, they might realise there are often better ways of sorting out their debt problems, in a more responsible way. Filing for bankruptcy isn’t always the golden solution.
There are disadvantages to bankruptcy
There’s a number of things you should know about before you decide to file for bankruptcy:
The cost. You have to pay a £680 fee when you submit a bankruptcy application to the Insolvency Service.
The publicity. All personal bankruptcies must be advertised, so people you know may read about it. Also, if you want to borrow £500 or more while you are declared bankrupt, you have to tell the lender, whether it’s a business or an individual, about it.
The restrictions. If you were a company director, you can’t hold that position any more (whether formally appointed or not – i.e. so called “shadow directorship”) until you’re discharged from bankruptcy. There are also restrictions in some professions, such as (e.g. finance, gambling, the police, security). Neither can you hold certain positions within the community, such as magistrate, school governor or charity trustee.
Your finances. All of your assets get put into the hands of an Official Receiver/Trustee in Bankruptcy to repay creditors, including your home. Your credit rating is affected and you will find it harder to get credit until you are discharged from bankruptcy.
The benefits
However, there are positives to filing for personal bankruptcy that might outweigh the negatives. It’s quite a straightforward procedure and you can get help to take you through it from a bankruptcy advisor.
The period of restrictions only last for 12 months (unless subject to a Bankruptcy Restriction Order) and, most importantly, all of your debts are written off and creditors can no longer chase after you for their money, so at the end of the process you have a fresh start.
Alternatives to bankruptcy
There are alternatives to going down the bankruptcy route that may be better suited to your circumstances:
- Debt Relief Orders give a period of relief from creditors to get your finances into shape. At the end of the period, you may be freed from all debts and they don’t require going to court, so the process is more private.
- An informal arrangement in which you come to a compromise with creditors. This may include a timetable for paying all or some of your debt back. However, it’s not binding on your creditors, who might still demand full repayment.
- Individual Voluntary Arrangements are a kind of informal arrangement that starts with a formal proposal to creditors. you will need an insolvency practitioner to prepare a report for the High Court, but any agreement is binding on creditors.
- If your total debts come to less than £5,000 an Administration Order can be made against you by the Enforcement of Judgements Office (EJO) by a creditor. You are bound to make regular payments to the EJO which go to your creditors, so you need a regular income. If you can’t keep them up, you can apply to change the order, otherwise you come under the same restrictions as for bankruptcy.
The next steps
There are always ways to deal with unmanageable debt, some you may not be aware of. Debt advisors exist to look at your circumstances and lay out the options available to you.
Debt is stressful but there’s always support available, whether it’s from friends and family or professional advice. Sharing your burden is the first step and it’s good for your mental wellbeing. So, your next step should be to reach out, or pick up the phone.
James Rosa Associates
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Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.