Trout Associates: Bankruptcy and its Alternatives

Estimated reading time: 5 mins

If you are in a personal debt crisis, one of the options you can choose to resolve it is something called bankruptcy. You have probably heard of it. It is a legal process that you can apply for if you can’t pay back your debts.

What most people don’t know is that as well as applying for bankruptcy yourself, it is a perfectly legal process for somebody else (that is, somebody you owe money to) to apply to force you to become bankrupt. If the conditions for it are met, they can do this without your permission.

Bankruptcy is a drastic choice that has consequences that can have an effect for a number of years. Even worse, the stigma associated with bankruptcy can have long-term self-esteem issues, even though it is simply a legal process. Sadly, it’s very common for people to tie their self-worth to their net worth.

Reasons for Bankruptcy

  • If bankruptcy is something you’re considering, or have embarked upon, remember that you are not alone and there are many other people going through it. 115,299 people became bankrupt in England and Wales in 2018 – this is the highest annual level since 2011.
  • For most people, financial literacy isn’t something taught at school at a young age. That means some people don’t have a financial plan in place that guides them on when (and when not) to spend money, and what to spend it one.
  • Unexpected bills – in the USA, roughly 530,000 people turn to bankruptcy because of unplayable medical bills alone. What many people do not realise, according to one researcher, is that their health insurance may not be enough to protect them. Hence the medical bills that spiral out of control. Most families do not have enough saved for a simple emergency such as a weather-damaged roof.
  • Sudden loss of job – losing a job is losing an income and the ability to pay for bills and pay off debts. The situation is wider spread than you might think. One in three working families in England would not be able to pay their rent or mortgage for more than a single month if they were to lose their income (source:Shelter). In the USA, millions of Americans are just one missed paycheck away from poverty. 4 out of 10 are considered “liquid-asset poor,” (that is, they don’t have sufficient accessible money) to cope with a sudden loss of income.
  • Divorce is a cause of bankruptcy – in the USA, federal bankruptcy courts are filled with people who have financial difficulties caused by a divorce. Not just because divorce attorney fees are high, there is also the costs of breaking up assets, alimony, and child support. And when the cause of a divorce comes from financial difficulties…

Trout Associates: The Advantages of Bankruptcy

  • The money you owe will usually be written off – in most cases it will result in a clean slate
  • You can make a fresh start when the bankruptcy order completes. In most cases, this is possible after only one year. This is called ‘discharging’ from bankruptcy
  • As the people you owed money to (your creditors) have been dealt with, you can move on emotionally and you won’t be subjected to the same mental pressure. Your creditors will also halt most types of court action to get their money back
  • You won’t be destitute because you’re allowed to keep the money you need to live on and also retain the things you need to use to function as a household

Trout Associates: The DisAdvantages of Bankruptcy

There are consequences to bankruptcy.

  • To apply to go bankrupt there is a £680 fee to pay, regardless of how your case concludes. If you’re strapped for cash (sort of goes with the territory) than this is a lot to lose if you don’t receive a satisfactory result
  • It will be very difficult to get credit whilst you’re bankrupt. Because your credit rating will be affected for 6 years, you probably won’t be given access to credit cards and must have cash to pay for even the simplest of items
  • If your income is high enough, your debts won’t be completely written off – instead you will make payments towards your debts for 3 years
  • Here’s the kicker – if you own your home, it may well have to be sold to pay for your debts. Other possessions may be sold too, for example, your car or jewellery
  • If you own a business, or are a shareholder in one, it might be closed down and the assets sold off
  • Some professions don’t allow people with a history of bankruptcy – e.g. if you are a solicitor or an accountant
  • If you’re a pensioner then some of your savings may be taken
  • Your immigration status may be affected by bankruptcy
  • Bankruptcies are published publicly so your friends and neighbours may well learn of it
  • Emotional stress and feelings of shame are common

Bankruptcy might not be your only option. Taking the above disadvantages into consideration, it might not be the best one for you. There are alternatives to consider.

Debt Consolidation, may be right for you as it involves a structured means of paying off debts without the same consequences of bankruptcy. It simplified debts and reduces the monthly payments, although it does often extend the term in which debts are paid.

You might have heard of IVAs (Individual Voluntary Arrangements.) These might be better for you than bankruptcy if you have £100 or more, per month, that you could use towards paying your debts and are happy to pay off debts over a fixed period of time

A Debt Relief Order may be right for you if your total debts are less than £20,000 and if you have less than £50 per month available to pay off your debts. You cannot be a homeowner and own any belongings (apart from items required to function as a household) cannot be worth more than £1,000 in total. This is a cheaper alternative to bankruptcy.

Otherwise, consider an Administration Order. If your debts comprise of £5,000 or less in unsecured loans, and you have a county court judgment (CCJ) for debt, then this may well be the best option for you as you will make a single payment per month to your local court, who will then divide this money between your creditors.

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