Published 08 February 2012 | Standard notes SN05055
Authors:
Lorraine Conway
Topic:
Insolvency
Bankruptcy is an option that is considered when an individual, sole trader or partnership becomes insolvent. An individual is deemed to be insolvent if they are unable to pay their debts as they fall due. There are advantages to bankruptcy. For instance, bankruptcy removes the uncertainty and pressure of having to deal with numerous creditors. Another advantage is that someone made bankrupt for the first time will generally receive their discharge just one year after the date of the bankruptcy order and, once discharged, most debts are written off and creditors cannot pursue the debtor.
However, there are also many disadvantages to bankruptcy. Once a bankruptcy order has been made by the court, all assets belonging to the bankrupt are passed to the Trustee in Bankruptcy for the benefit of the creditors. In effect, the bankrupt will lose any realisable assets of value. This means that if there is equity in a family home, this property could be sold. If the debtor owns a business, this could also be sold. In addition, there is the stigma of being declared bankrupt and the restrictions placed upon the bankrupt (for instance, not being able to apply for credit of £500 or more without disclosing his/her bankruptcy). Bankruptcy proceedings can also be expensive, with all fees for the Insolvency Service and any trustee coming from the debtor’s own assets.
There are alternative options to bankruptcy that may, depending on their circumstances, provide a better outcome for both the debtor and the creditors. The main alternative procedures are:
• Informal Arrangements
• Individual Voluntary Arrangements (IVAs)
• Administration Orders
• Debt Relief Orders
This note considers each of the alternative options in detail.
However, it should be emphasized from the outset that before taking any action, proper independent legal and/or financial advice about bankruptcy and possible alternative procedures should be sought. This may involve consulting a solicitor, a qualified accountant, an authorised insolvency practitioner or a financial advisor. Alternatively, Citizens Advice may be able to provide advice free of charge.