Credit Crunch

Pro’s and con’s of bankruptcy

If times are really hard you may want to consider declaring yourself bankrupt. To be declared bankrupt you must be ‘insolvent’; this means that you must prove that you don’t have enough money coming in each month to pay your essential living expenses as well as your debts. You must also prove that your debts are a greater sum than your assets. This is especially relevant to homeowners because if you have any equity in hour home, and it is greater than your debt, then you cannot be considered insolvent.

Some professions take a dim view of bankruptcy and may even terminate your employment if you become a bankrupt. These include some accountants, solicitors and certain posts in the financial services sector. Once you’ve been a bankrupt, you can’t become an MP, a member of the Local Authority or a Justice of the Peace either. You are also not permitted to form a company – or promote a company – unless you have specific permission from the court to do so. Other professions may not terminate your employment but being declared bankrupt could adversely affect your career if, for example, you’re in the police or armed forces.

Depending upon your individual circumstances, and how you and your spouse deal with your personal finances, your being declared bankrupt could have an adverse effect on them. However, if your finances are separate to your spouse’s, their property and assets are unaffected by your situation. So, for example, if your home is solely in your wife or husband’s name, it cannot be considered as part of your assets.

Your being declared bankrupt at the same address as your spouse or your children could affect their credit rating so in order to ensure this doesn’t happen, each person in the household should contact one of the credit reference agencies – such as Experian – and request in writing that they be allowed to lodge a ‘disassociation’ from you in their own credit file. This basically means that any information relating to the person who’s been declared bankrupt is removed from that individual’s credit file.

So, what are the advantages and disadvantages to bankruptcy?

Advantages

a) If you are declared bankrupt, you are no longer responsible for your debts

b) After 12 months you’ll be declared ‘discharged’ from bankruptcy, which means that any restrictions on you will be lifted and any outstanding debt will be written off, with a few exceptions such as student loans.

c) Although your house and car may be seized as assets – and sold – other household goods will be safe. This includes items such as DVD players, three piece suites, ‘fridge, cooker etc.

d) Your repayments usually only last for 3 years – which is 2 years less than with an IVA.

Disadvantages

a) Your being declared bankrupt will be public knowledge and your name will be published in your local newspaper and the London Gazette. This of course could cause you and your family some embarrassment.

b) You may be ordered to make a contribution from your monthly disposable income - over and above £99 - to the court. This is usually for 3 years.

c) Your credit rating will be damaged and record of your bankruptcy will stay on your credit file for 6 years.

d) Debts to the Student Loans Company will not be included and still require you to repay them.

e) You may have to surrender your house, car and other assets but ‘reasonable’ household items are not at risk. It should be noted that cars valued up to a maximum £2,500 should not be considered assets either.

You can get advice about bankruptcy from your local citizen’s advice bureau or from your bank or financial advisor.