While bankruptcy should always be seen as a last resort, it could be a viable option for those unable to cope with their financial problems. But before you take such a major step it is important to weigh up the pros and cons.
How bankruptcy works
To go bankrupt, either yourself or one of your creditors must apply to the courts. Should you decide to file yourself, there is a court fee of £175, and you will be liable for the cost of managing the order, meaning an additional payment of more than £500.
Once the court has granted the order, your assets and personal finances are assessed by a 'trustee', usually appointed by the court, who effectively takes control of everything you own. Though you may be left with personal belongings, assets not related to your work or basic needs, including your home, will likely be sold to help pay off your debts.
As long as you stick with the terms of the bankruptcy as set out by the trustee, you will be 'discharged' from the order after 12 months.
While it might seem like an instant debt fix, bankruptcy is no such thing. By filing for bankruptcy, you run the risk of losing any investments, luxury belongings and your home, even if it is jointly owned, while debts such as court fines and student loans are not covered by the order.
Throughout the duration of the order, you will be liable to certain restrictions, which prevent you from borrowing more than £500 without declaring your situation, and you will be unable to set up and manage a business.
Even after you have been released from the 12-month order, the trustee can still retain control of your property (provided it hasn't been sold to cover the debt) for three years after the date of filing, and you will be forced to use a portion of your disposable income to continue paying towards your debts via an Income Payment Order.
Your financial situation will also be published in the local paper.
But perhaps the biggest issue facing anyone filing for bankruptcy is their ability to get credit in the future. A bankruptcy order will linger on your credit file for six years, making it near-on impossible to gain credit of any sort during that time.
The obvious advantage of bankruptcy is that you are legally protected, and the dreaded demands and bailiffs threats will stop.
Any debt that remains after the set period of time is written off, giving you a fresh financial start.
Therefore bankruptcy works best for those that cannot cope with their level of debt but have very few assets of any worth to lose.
Remember, while it may seem like the only option, there may be an alternative to bankruptcy, such as an IVA or debt management plan. If you are worried about debt and are unsure about the best way to deal with it, speak to the Citizens Advice Bureau or contact the National Debtline on 0808 808 4000 for confidential and independent advice.
Have you ever declared bankruptcy? What advice would you give to someone considering this option? Leave your comments below...