I am often asked what the options are when in financial difficulties. Many people know about bankruptcy as an option, but don’t necessarily know how to go about it, or the pros, cons and alternatives. This is a brief summary.
Bankruptcy is a way of getting rid of your debts. You can declare that you are unable to pay everything off by making a 'petition' (i.e. request) to a relevant local County Court. The cost is a court fee (£120), a deposit towards costs (£250), and sometimes a fee to swear or confirm your financial position (£7). The court then makes a 'bankruptcy order', and appoints the Official Receiver (a person who works for the court) to control your finances for at least a year. Your bankruptcy is registered, and published. From that moment you stop using your existing bank account, and stop paying your debts.
Within 21 days of the Order, you must list all assets and debts for the Official Receiver. You must report all your income, and any assets you have, or any extra funds above normal living expenses, should go to pay back your debts.
During the period of bankruptcy, you cannot borrow more than £250 without telling the lender you are bankrupt. You can open a bank account, but can't have an overdraft. At the end of the period (often a year, sometimes more), you are 'discharged' - that is, the court declares that you are free of the debts.
A bankruptcy stays on your credit record for six years. Even after that, you may be asked (e.g. by mortgage providers) to state if you have been bankrupt.
Alternatives to bankruptcy include:
1. Informal arrangements. You agree reduced payments with your creditors, but they can reverse their decision at any time.
2. Individual voluntary arrangements. A professional insolvency practitioner (IP) acts as intermediary. You pay the IP, and they pay the creditors. The IP charges you a fee.
3. Debt management plans. A debt management company helps you make a plan and agreement with your creditors. As with informal arrangements, creditors don't have to stick to the plan.
4. Administration orders (only for debts totalling < £5,000). The court acts as intermediary and takes a 10% fee.
5. Debt relief orders (only for < £15,000 where you have <£50 per month spare income and < £300 in assets). Student loans don't apply. An authorized debt adviser applies to the Official Receiver on your behalf. The application fee is £90. This is very like bankruptcy, but slightly cheaper and simpler to administer, and you are less likely to have to attend court.
6 Fast-track voluntary arrangements. Involves the Official Receiver. Relevant if you have easily saleable assets and want to cancel a recent bankruptcy quickly by cutting a deal.
For more on debt options the follwing Government link is good:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/Debtrepaymentoptions/DG_10023185
For more on debt relief orders, see the following from the Citizens Advice Bureau:
http://www.adviceguide.org.uk/index/life/debt/debt_relief_orders.htm
I hope this all helps!
