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26.02.2018

What Does Bankruptcy Mean?

What Does Bankruptcy Mean?

Bankruptcy is probably the most famous formal debt solution. It has featured on a number of television shows and movies as a terrible and terrifying experience, but the details of what bankruptcy actually entails is often neglected. So what actually is bankruptcy, and what does it mean for people to go bankrupt?

Bankruptcy

Simply put, bankruptcy is a way for your debts to be settled with your creditors when you become insolvent, which means you are unable to pay your debts. This applies to people living in England, Wales and Northern Ireland. Scottish residents have an equivalent called ‘sequestration’. You can apply to become bankrupt, but your creditors can also apply to the courts to make you bankrupt if they are concerned that you are unable to pay your debt to them.

The Process

Generally speaking, the bankruptcy process involves an ‘Official Receiver’ taking control of your finances and assets, and you must pay them £680 in order to do this. Your belongings become their property. This includes your bank account, your home (if you own it), your car, and anything else you own that has value, also known as equity. Equity is the amount of money you would make if you were to sell a piece of your property. For example, if you were to sell your home, the equity would be: equity = the current value of the house – your remaining mortgage – costs associated with selling a house.

Your Official Receiver may also organise a monthly contribution that you must pay towards your debts for up to three years. This is calculated based on your income and expenditure. However, your actual bankruptcy should only last a year. Many people find the process incredibly disruptive as you are unable to have control of your own finances for at least a whole year and many of your goods, such as your TV, your car, and even your home could be sold. Some careers can also be affected as it could be in your employment contract, or more generally illegal, for you to work in your field while you are bankrupt or if you have ever been bankrupt.

On the other hand, due to the formal and legal nature of the bankruptcy, your creditors will stop contacting you and cannot take any further legal action against you. This is also true of other debt solutions, however, so it is worth researching all your options before you apply for bankruptcy, to make sure you find the debt solution that best suits your financial and debt situation. Click here to find out more about the bankruptcy process.