Declaring bankruptcy is a sad event but it happens to many cash-strapped Brits who find themselves unable to pay their debts, including BNP leader Nick Griffin. Nearly 60,000 people declared bankruptcy in 2010, according to the National Insolvency Service.
So what happens to your debts? Why should you declare bankruptcy? Here's all you need to know if bankruptcy looms as the only option. Bankruptcy applies just to individuals as companies who go bust are classed as "insolvent".
How do you apply for bankruptcy?
A court has to issue a bankruptcy order against you, which can happen either after you make an application and admit you are unable to pay your debts, or your creditors (the people you owe money to) apply if you owe them £750 or more.
How could bankruptcy help?
It can help take the pressure off dealing with your debts, as an official - called the Official Receiver - takes over your money and property to deal with your creditors. That's why BNP leader Nick Griffin tweeted about his bankruptcy: "It does free me from financial worries. A good day!"
You are normally still able to keep a reasonable amount to live on and essentials you may use to work and live.
When your bankruptcy period is over, any money you owe to creditors is normally written off.
Creditors also have to stop most court action they have been pursuing to get their money back following a bankruptcy order, but sometimes bailiffs can take your belongings away.
But what about the disadvantages?
You cannot keep bankruptcy private, as details will be listed on the Insolvency Register, which people can access on the internet, and your case could be published in your local paper.
Your immigration status could be affected and the record of bankruptcy will stay on your credit reference file for six years, so it can hamper your ability to get credit.
It may cost up to £700 to go bankrupt and the process of having your assets taken over can lead to you losing your home or any other possessions that you own. If you own a business, the Official Receiver can close it down, sack all your staff and sell its assets.
Even if bankrupt, there are some debts such as court fines and student loans that will never be written off.
If you are made bankrupt, you'll also have to follow "bankruptcy instructions" which mean you are unable to do any of the following:
- borrow more than £500 without telling the lender you’re bankrupt
- be a director of a company
- create, manage or promote a company without the court’s permission
- manage a business with a different name without telling people you do business with that you’re bankrupt
- work as an insolvency practitioner (an authorised debt specialist)
Breaking any of the restrictions is a criminal offence and can lead to you staying in bankruptcy for even longer. The restrictions normally last for a year from the date set by the court for your bankruptcy.
What do the officials take during bankruptcy?
You can usually keep items needed for your job like tools and your car and basic husehold clothing like clothing and furniture. However, you may have to give them up if a cheaper replacement can be found reasonably.
You are also obliged to give the Official Receiver your bank cards, cheque books and credit cards, with your accounts frozen. You are normally unable to take out further credit.
You could also be made to make monthly payments from your spare income, whihc can happen if money raised from selling your assets doesn't cover your debts. This arrangement, called an Income Payments Agreement (IPA), can last for up to 3 years.
If you don't agree to an IPA, the court can order you to make the payments under an Income Payments Order (IPO).