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Bankruptcy advice – benefits and consequences

Paula22nd October 2010

The previous post gave an overview of bankruptcy. I will now explain the main benefits and consequences of bankruptcy. Please note that before you decide on bankruptcy it is important that you seek bankruptcy advice.

Benefits of bankruptcy

Clearly the biggest benefit of bankruptcy is that it will discharge you of your obligation to repay your bankruptcy debts. Bankruptcy debts are defined as those that can be legally discharged in the bankruptcy. There are certain debts, such as student loans, that cannot be included. That is one reason why bankruptcy advice is important. Although tax credit overpayments can be included it is important that you time this correctly. Please read my next post for information about bankruptcy and tax credit overpayments.

Another benefit of bankruptcy is that it offers you some legal protection. A creditor will need the permission of the court to commence legal proceedings against you. Further to this existing proceedings can be stayed or allowed to continue as the court sees fit. There is however some creditors, such as a landlord, who can continue with some forms of recovery action. Again, this is where good advice will help you to understand bankruptcy better.

Compared to other solutions bankruptcy is short and assured (providing you meet your obligations). It lasts a maximum of 12 months and your bankruptcy debts will be cleared. Compare this to other debt solutions where you could be repaying your debts for a significant period of time. Upon receiving advice you should be able to determine which solution is most appropriate for yourself.

Consequences of bankruptcy

Unfortunately the number of consequences of bankruptcy outweigh the number of benefits, however, that does not mean that the impact of those consequences outweigh the relief that bankruptcy brings. The following paragraphs provide an overview of the consequences.

The most common knowledge consequence of bankruptcy is that you lose control of your assets. Any that are not exempt from the bankruptcy estate are at risk. It is important for you to establish how your assets are likely to be affected before you go bankrupt.

Following bankruptcy your credit worthiness will be extremely poor. Bankruptcy remains on your credit report for a period of six years. This will affect you in the future, when you apply for a mortgage for example.
Once the bankruptcy order is made your bank will be notified of your bankruptcy. As such your bank account will be frozen and it may be closed.

If you run your own business then it may be closed and any employees dismissed. There is nothing from stopping you set up another business providing you adhere to the bankruptcy restrictions.

Some professions prohibit you from practising as a bankrupt.

Bankruptcy restrictions will apply from the date of the bankruptcy order. There are three stated restrictions which prohibit you from certain actions. It is important to know what they are.

One of the more serious consequences of bankruptcy is known as bankruptcy offences, which are punishable by imprisonment or fine. Although they are uncommon it is important that you understand them to ensure you do not commit one. An example of a bankruptcy offence is concealment of property.

A bankruptcy restrictions order may apply if the investigation into your affairs determines that you are somewhat blameworthy for your bankruptcy. Such an order has the effect of prolonging the restrictions of your bankruptcy for a period of between 2 and 15 years.

If during your bankruptcy you have enough of a disposable income then you will be expected to contribute to your bankruptcy estate for a period of 3 years. This will involve making payments to the equivalent of between 50% and 70% of your disposable income.

Previous transactions that you have entered into may be reversed. An example of this could be repaying a family member in preference of other creditors before your bankruptcy. Another example could be selling assets for less than their market value before your bankruptcy.

Getting bankruptcy advice

The above information provides an overview of the benefits and consequences of bankruptcy only. In reality bankruptcy can become complex and it can benefit you enormously to seek bankruptcy advice. This will help you understand the consequences in relation to your personal circumstances and also remove any uncertainty of the bankruptcy process. In turn this will help you to minimise the consequences.

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