What is Bankruptcy?
Bankruptcy refers to the legal process by which a court rules upon whether to discharge an individual or a company’s debts.
In the UK the bankruptcy court order usually lasts one year.
These laws exist to allow for the possibility of a fresh start when debts become overvhelming.
Some 122,181 individuals filed for bankruptcy in the UK during 2019, as opposed to 17,196 company insolvencies.
While the correct terminology for corporate debt is insolvency, it remains common parlance to refer a company going bust or bankrupt.
An individual declares bankruptcy, whereas a company (or partnership) becomes insolvent.
Read on to learn more about the process of filing for bankruptcy, and the consequences.
When Should You Declare Bankruptcy?
Whether you’re an individual or a company, the basic situation predicating bankruptcy is the same. Your debts have become overwhelming and you are either being forced into bankruptcy by a creditor, or it’s an option you’re choosing due to a desire to eradicate the debt.
Your debts must outweigh your assets for your to be considered officially insolvent. If you don’t owe more money than you have in possessions the bankruptcy order will not be accepted.
Bankruptcy does write off most debts but it also comes with consequences, so it’s only something you should consider as a last resort.
You should first have spoken with a debt professional and considered alternatives such as debt consolidation, an Individual Voluntary Arrangement (IVA), or a Debt Relief Order (DRO).
Does Bankruptcy Clear all Debt in the UK?
For limited companies, insolvency (bankruptcy) has a number of potential outcomes. If the outcome is the liquidation of the company then, yes, all the debt is eradicated as the company itself comes to an end. It will be the insolvency practitioners’ job to pay creditors as much as possible from the same of any assets.
For individuals, bankruptcy does mean the end of most debts, but there are certain exceptions. These are:
- Any fines from magistrates courts
- Child maintenance arrears
- Loans from The Studen Loans Company
- Secured loans
- Specific debts a court has ordered you to pay. These might include payments from a confiscation order, or as a result of the injury or death of another person
- Social fund loans
How Much Debt do you Have to Have to Declare Bankruptcy?
As an individual, you can’t be forced into bankruptcy unless your debts exceed £5000.
If your debts are less than £20,000 bankruptcy may well be a less appropriate solution for you than a Debt Relief Order. These are a type lf low cost alternative to bankruptcy, freezing yout debt repayments and interest for 12 months, protecting you from creditor action in the meantime. at the end of the 12 months, your debts will be written off.
If you’re the director of a company, however, the situation is a little different. There is no threshold you need to cross to declare insolvency, rather that is a state of affairs you reach. If you feel you’ve done so, simply speak with one of our team to discuss your options. Insolvency doesn’t necessarily mean the end of your company, but it does mean decisive action is needed.
What do you Lose if you Declare Bankruptcy?
Exactly what the consequences of bankruptcy will be depend on each case.
If your company has gone insolvent there will no consequences for you as a director, since the limited company structure is designed to limit liability. Exceptions to this will be if there is evidence of misfeasance or if you’ve signed a personal guarantee document for secured finance.
As an individual with bankruptcy order:
- You’ll be highly unlikely to lose your job unless you work in specific industries where financial integrity is vital such as solicitor or accountant.
- It shouldn’t affect renting a property unless your landlord has a specific clause in the lease to that affect
- It is likely to affect your mortgage and your house since the Official Receiver will be looking to repay creditors as much as possible from the sale of your assets
- You are likely to lose your car, savings, investments
- Your pension is not at risk if you’re under 55, except in unusual circumstances
- It will affect your credit score
- An end to creditor pressure
- Individual bankrupts can keep essential possessions, plus those needed for your job or valued at less than £2k. Corporate insolvency will not affect personal finances at all except in the aforementioned exceptions
- Almost all your debts will be written off permanently
- An end to court action (except in rare exceptions)
- In cases of individual bankruptcy, those with sufficient income will be asked to contribute to debts for a period of 3 years
- Your credit score will be affected for 6 years
- Individual bankruptcy may force you to sell your home, or for renters a landlord could enforce the end of tenancy
- It could affect your immigration status
- It could affect your job in specific industries
- Since bankruptcy is advertised publicy it could affect your reputation
- A bankruptcy restriction order can extend the implications of bankruptcy to 15 years as opposed to the normal six.
- The process costs £680