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If you are considering filing for bankruptcy here's what you need to know.
The pros and cons
For those who are facing serious debts bankruptcy can provide respite from chasing creditors, bailiffs and financial burden. But it comes at a price.
Those with their own home, investments and luxury belongings can stand to lose much more than their debts. Property and other assets can be sold off to help pay the debt, which could mean you lose the family home, while any disposable income would also be used to help pay off your creditors.
Filing for bankruptcy will also have a serious effect on your ability to get credit for some time in the future, leaving you unable to borrow even after you have been discharged from the initial order.
While it should always be seen as the last resort, those with considerable debts who are not homeowners and have very few assets will probably escape the worst.
How it works
If you have decided bankruptcy is your only option, or if proceedings are taken against you, legal or financial advice should be your first port of call. An insolvency practitioner, solicitor, certified accountant or even the Citizens Advice Bureau should be able to guide you through the process.
To begin, you will have to declare yourself bankrupt at the local county court. There is a court fee of £175 as well as £525 to cover the cost of managing your bankruptcy, though some charities may be able to help and the court costs may be waived if you are on income support.
Once the court has granted the bankruptcy order, all of your assets and finances are turned over to a 'trustee', either an Official Receiver or an insolvency practitioner.
Following an initial interview at which the court-appointed trustee will need details of all of your outstanding debts, he or she will write a report. They will then determine how best to pay back some or all of your debt, which may include selling property or other assets (including private pensions and savings), and taking control of your earnings.
Your bank or building society will freeze your accounts, meaning you are unable to make or receive payments and must make other arrangements to pay household bills.
Notice of your bankruptcy order will also be made public via the local newspaper.
The trustee requires your full co-operation. As long as they are satisfied that you have done everything required of you, the trustee may discharge you from all the debts owed after 12 months.
Even when you are discharged from bankruptcy after the 12-month period, the effects can last well into the future. Any assets claimed by the trustee will not be returned to you and he can retain control of your home for up to three years.
When you have been discharged, you must continue to use any disposable income to make payments towards your debts via an Income Payment Order, again, for three years after the date on which you filed. Lastly, a bankruptcy order will usually stay on your credit file for six years in total, though you may send a certificate of discharge showing details of when you were discharged.
Remember, no matter how terrible your financial situation seems, bankruptcy should ALWAYS be your last resort. If you are struggling to cope with debt, there may be other alternatives available to you so it is essential to get advice before taking action. Services such as the National Debtline or the Citizens Advice Bureau will be able to talk you through the options and help you decide which is best-suited to your circumstances.
Have you ever filed for bankruptcy? Tell us about your experiences below...