Advantages and disadvantages of declaring bankruptcy

The practical implications of bankruptcy include:

• Most debts are written off
• Assets need to be relinquished and disposed of by the bankruptcy trustee (often the official receiver, who looks after the assets of the bankrupt and distributes them to creditors)
• Bank and building society accounts will be frozen and controlled by the trustee
• During the bankruptcy period, accessing any form of credit is extremely difficult (and there are other restrictions)
• Credit ratings can be affected for up to six years following a bankruptcy order

Bankruptcy enables a debtor to write off most of their debts. If the level of debt exceeds the total amount of assets held by the debtor (including any equity in their home) and repayment would take many years, bankruptcy may be preferable to other debt repayment options.

Bankrupts are allowed to keep some of their assets which include:

• Items which they need for their job (eg tools or a vehicle). In Scotland, vehicles must be worth less than £3,000 to be retained for work purposes.
• Household items (eg clothing, bedding and furniture).
• Money which they urgently need (eg to buy food).
• Money belonging to a partner which held in a joint account. This is given back to the partner.
• Generally any money which they have put into a pension.
• If a family home (ie where the bankrupt and/or current or former spouse/civil partner reside) has not been sold by the bankruptcy trustee within three years of the date of the bankruptcy order, it may be returned to the bankrupt.

Bankrupts will lose most of their assets and access to credit for at least a year. Their home may be sold (depending on the amount of equity). Furthermore, during the bankruptcy period, they will face certain restrictions including not being allowed to:

• Borrow more than £500 without informing the lender of their bankruptcy status. In Scotland, they cannot borrow more than £2,000 without informing the lender of their bankruptcy status.
• Act as a director of a company (unless the court gives permission).
• Create, manage or promote a company (unless the court gives permission).
• Manage a business with a different name (unless they inform anyone they do business with that they are bankrupt).
• Work as an insolvency practitioner.
• In Scotland, they cannot act as a Member of Parliament, as a member of any local council, a Justice of the Peace or a member of a school board.

Although most debts will be written off once the bankruptcy has been discharged, monthly payments required as part of an Income Payments Agreement may need to be made for up to three years following bankruptcy (pension payments may be taken into account). 

In Scotland, if you are assessed as having enough money, you will have to pay contributions towards your debt for four years.

Further, in Scotland, if you obtain new property or money within four years of declaring bankruptcy, it may be claimed by the bankruptcy trustee.

Individuals considering bankruptcy should weigh up the pros and cons discussed above before deciding whether to proceed. If there is no prospect of improvement in their financial situations - and if their debts will take many years to repay - bankruptcy may prove to be a sensible option. However, they should first consider alternative ways of dealing with debts.

Potential bankrupts should assess the consequences of bankruptcy upon the full value of their assets - particularly if they own significant equity in their home. Furthermore, certain professions (eg solicitors and accountants) apply restrictions on membership regarding individuals who have been bankrupt, so it is important to check this aspect as well.