Main Effects of Petitioning for Bankruptcy

1. The Risk to Your Current Assets

   With bankruptcy your assets (property, shares, anything of real value or even non-essential) can be sold to pay your creditors. This makes bankruptcy a more sensible option where you don't have much in the way of assets. It also means declaring bankruptcy to cope with non-priority debts puts all the debtor's property at risk ... a strategy that would seldom be advised.

   Only the property owned by the debtor is directly at risk, jointly-owned property (such as the family home) may be sold by the trustee to realise the value of the debtor's share.

   Additionally, in bankruptcy the trustee can investigate any gifts or undervalued sales made in the previous five years. If the gifts or sale were made when the debtor was insolvent, the trustee can take steps to claim the value of the gift, or undervalued part of the goods, from the recipient.

    

2. The Risk to Your Future Assets

   Where the debtor expects to receive an inheritance or already has assets, consideration should be given to any increase in value they may have whilst a bankruptcy order is in place.

   Arranging matters so as to avoid losing out in such circumstances may be possible (such as amending a will) but not by transferring assets as detailed above.

    

3. The Effect on Your Future Credit

   An undischarged bankrupt must declare his status when seeking credit of more than £500, including hire purchase and conditional sale agreements. It is an offense not to do so.

   Attempting to run a business can be hampered by being an undischarged bankrupt, since credit will be nigh on impossible. Undischarged bankrupts are also forbidden from being company directors, unless they obtain special leave from the court.

   Whilst utility companies cannot insist on payment of pre-bankruptcy arrears as a condition of continuing supply, they will usually require a security deposit and insist that a pre-payment meter is fitted.

    

4. The Effect on Your Employment or Business

   There are certain jobs you cannot have if you are an undischarged bankrupt: Company Director (or concerned directly or indirectly in the management of a company), MP, Councillor, Magistrate or Estate Agent. A bankrupt usually can't be a school or college governor and there are restrictions under charity law as to the role a bankrupt can serve on management committees.

   Security firms may not wish to employ an undicharged bankrupt, particularly where money is involved. And the same applies to the civil service. The rules for professions such as solicitors and accountants make it virtually impossible for people who've been bankrupted to work in these professions.

   For a sole trader the effects can be even greater. Whilst bankruptcy does not necessarily mean the busines will close, continuing to trade will be made more difficult:

   • If the business needs credit, the requirement for the debtor to disclose that he is an undischarged bankrupt will make suppliers unlikely to provide credit;
     

   • The bankruptcy order will be advertisied locally, which could damage the reputation of the business in addition to that of its proprietor;
     
   • The debtor cannot trade under a name other than the one under which he was made bankrupt;
     
   • If items of business equipment are used by the debtor's employees rather than the debtor personally, exemption from sale cannot be claimed and the trustee may order them sold. This also includes stock in trade which the trustee can sell on behalf of the bankrupt's estate.

    

5. The Effect on Your Housing

   Homeowner or tenant, bankruptcy can still cause problems. For homeowners it can limit the ability to move to another property by reducing your ability to borrow money. It does not, however, prevent you from exchanging local authority or housing association property (providing local rules do not prohibit this).

   For tenants, the inability to borrow can make it difficult to raise the deposit and/or the advance rental payments.

    

6. The Effect on Your Reputation and Stress

   The process of declaring bankruptcy can be very stressful.

   When declaring bankruptcy, it is possible that there may be a public examination of financial affairs and conduct of the debtor in open court. Though this only happens when there has been a failure to co-operate with the Official Receiver or if it is requested by 50% of the creditors.

   An advertisement will be published in a local paper notifying of a person's bankruptcy and inviting claims from ceditors. The details can also online at a Public Register maintained by the Insolvency Service.

   For many there is still a stigma attached to declaring bankruptcy and debtors can be made to feel like criminals, though they most certainly are not.

    

7. Do You Have the Resources?

   Just like an IVA, there are large expenses racked up when declaring bankruptcy with court and insolvency service fees applied.

   Additionally, a charge of 15% will be levied on all sums received by the Official Receiver/trustee. This is paid out of the debtor's assets.

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