Advantages and Disadvantages of Bankruptcy

There a number of advantages and disadvantages to Bankruptcy. Their relevance will very much depend on your individual circumstances. We consider the advantages first.

The Advantages of Bankruptcy

1. No payments unless you can afford to make them
Once you are declared bankrupt you no longer have to make payments to your creditors. Instead the official receiver will review your income and expenditure. If you can afford to make any payments towards your debts these are made directly to the official receiver in the form of an income payment agreement and are only payable for three years.

2. Only lasts 12 months
Other then in very unusual circumstances, your bankruptcy will only last for 12 months. You will then be discharged and no longer bound by the restrictions of bankruptcy. After your discharge any windfall payments you receive (other than a PPI compensation claim) will be yours to keep.

3. Debt written off
Once you are discharged from your bankruptcy, your unsecured debts are taken away from you and you no longer have a responsibility to repay them. You will only continue to pay towards your unsecured debts if you have an income payment agreement which will only last for a maximum of 3 years.

4. HMRC Tax and VAT debts can be included
If you have any HMRC debts such as tax arrears these can all be included and written off in bankruptcy.

The Disadvantages of Bankruptcy

It is important to understand that as well as benefits, declaring yourself bankrupt can also have some disadvantages. Before making a decision to go bankrupt you need to understand these in the context of your circumstances.

1. Homeowners property may be at risk
If you are a homeowner, it does not automatically mean that you will lose your property if you are declared bankrupt. In fact if there is little or no equity or the property is in negative equity it is likely that you will be able to keep it. However if there is significant equity in your home which is in your name, then the official receiver will be obliged to realise this by forcing the sale of the property if necessary.

2. Car may be at risk
In bankruptcy you are allowed to drive a car if you need one for work or other reasonable family commitments. However your car can not normally be worth more than £1000. If it is you may be forced to sell the car and replace it with a cheaper one.

3. Your living expenditure will be restricted
During your Bankruptcy and for the duration of any Income Payment Agreement you will be required to live within a restricted living expenses budget. You will have to pay all of your surplus income towards your debts. If your income increases your payments may also increase for the remainder of your Income Payment Agreement.

4. Payments have to be made for three years
If you can afford to pay towards your debts you will have to do so in the form of a income payment agreement for 3 years. This means that you may have to continue making payments even after your bankruptcy has finished. While the income payment agreement is in place you must report changes in your income to the official receiver and your payments may increase or reduce as a result.

5. Some jobs are affected
If you are declared bankrupt you will not be able to continue working in certain positions or hold certain operating licenses. The main roles that you will be excluded from while bankrupt are:

Company Director, Solicitor, Accountant and various roles in the financial services community. You will not be able to hold an HGV operator’s license or a publican’s license.

6. Only unsecured debts are included
All of your unsecured debts are included in your Bankruptcy. However secured debts such as your Mortgage are not included. You must maintain the monthly payments towards your secured debts even after you are Bankrupt or you will risk the property or other asset that the debt is secured against being repossessed.

7. Negative effect on credit rating
If you are declared bankrupt, your credit rating will become significantly worse. For more information see How bankruptcy affects your credit rating.

8. Your details will be included in a public register
Once you go Bankrupt your name, date of birth and address will be added to the Insolvency Register. This register is publically accessible and via the internet. As such anyone could discover that you are Bankrupt if they search the register for your name. Once you are discharged your name and details will be taken off the register.

Additional information

More information about the Bankruptcy solution is available in the left hand column. However only a brief overview is given here. For more details and advice please see one of our dedicated information websites:

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