Bankruptcy

At this time of year many of us will be feeling the post-Christmas pinch in our wallets but for some debt can become an all-consuming worry. Accountancy firm Grant Thornton has predicted that 28,000 people will become bankrupt within the first three months of 2008. By the end of the year this figure will have topped 120,000.

The numbers sound ominous but what exactly is bankruptcy?

Bankruptcy can in fact be a way to deal with your debt. If you have accumulated debts and, even after placing yourself on a strict budget, find yourself unable to make payments to your creditors it may be that bankruptcy is the only solution. In such a situation the interest and penalty charges for failing to keep up with payments plus the pressure from creditors chasing you can make life a misery.

By becoming bankrupt you give up the right to control your own finances. Your property including your home can be sold and the money raised distributed as payment to your creditors. In England and Wales you will be bankrupt for a period of one year; in Scotland the duration is currently three years. At the end of this period outstanding debts will be cleared giving you, in some respects, a fresh start free from debt.

However, bankruptcy must be taken seriously and the fresh start is a limited one at most. Some types of debt such as court fines and student loans will not be cleared. If you own a business it is likely this will be closed and any staff sacked. Your bankruptcy will be recorded and made public. It can be difficult to gain access to credit in the future and some types of employment are not open to people who have been made bankrupt.

Because of these consequences it is important to understand the alternatives to bankruptcy. In England and Wales one alternative way to deal with debt is an Individual Voluntary Agreement (IVA). This may be appropriate if you are able to pay a lump sum, or make regular payments, to your creditors. You will need an insolvency practitioner to negotiate with your creditors on your behalf and so will need to be able to afford their fees. In Scotland the comparable alternative to bankruptcy is called a Trust Deed. Whereas an IVA does not involve the courts a Trust Deed does.