Bankruptcy is a form of insolvency, just because someone is insolvent, does not mean they will go bankrupt.
Seem difficult to follow, I’ll explain.
Insolvency is when your liabilities exceed your assets; you owe more than you have to pay. You are insolvent.
Bankruptcy is a form of insolvency in that it is a way to deal with the insolvency. Just because you are insolvent does not mean you will go bankrupt, you may enter into an IVA/Individual Voluntary Arrangement, or a DRO/Debt Relief Order, or you may choose to enter into a Debt Management Plan.
You are still insolvent, but you have chosen a different way to deal with it.
If you deal with the insolvency using a DMP or Debt Management Plan, this is an informal way to handle your debts, an agreement between you and your creditors. It is not legally binding.
Using Bankruptcy, or a DRO is using the courts as a way to handle the insolvency, and an IVA uses IP’s or Insolvency Practitioners as a way to deal with the insolvency.
You are still insolvent in an IVA, but you are trying to find a way to pay back something on the accounts.
When you go bankrupt, you are asking the courts to intercede on your behalf as you can no longer handle your debts, and you want their help.
They offer their help, but at a price/cost.
Not so much in money, but if you have assets, the court or OR/Official Receiver will want to liquidate these assets to pay their fees, and to pay back something to your creditors.
However, if you go bankrupt and have no assets, then anyone you owe technically will receive nothing.
Also, Bankruptcy affects your credit and credit score, it stays on your credit file for six (6) years.
Bankruptcy is a serious financial decision, and as such it needs to be given its due, and you should also seek out professional advice prior to going bankrupt.
Is Bankruptcy Too Easy?
There are those that feel going bankrupt is too easy, it has been made too easy to just wish away your debts.
While insolvency rates have risen and dropped over the years, the actual process of going bankrupt has not changed.
Going bankrupt is as simple a filing two (2) forms, and paying the bankruptcy fees, which are £680, and can be paid in instalments, and you are declared bankrupt.
That is the easy part, next it gets more difficult, or anxiety provoking.
An Official receiver is appointed to look over the bankruptcy forms and to see if there are any assets that can be liquidated to sold to pay money to the creditors.
If there are no assets, then things are simple.
If you own property, it can get complicated, and there are alternatives to bankruptcy, such as an IVA, that may allow you to be insolvent and keep your property.
This is why you need professional advice.
Once you are declared bankrupt, in most instances you are bankrupt for a period of 12 months, and then the bankruptcy is discharged, you no longer owe the debts, and are starting out fresh.
Seems simple on the surface.
If you have a surplus of income after your allowed living expenses, yes your income and expenses are reviewed, you can be required to pay into the bankruptcy for three (3) years.
As to if going bankrupt is easy, in a sense yes it is, but it is also easy for a reason, being insolvent is a difficult and stressful period, the ease at which to go bankrupt is to minimise that stress.
Bankruptcy and Jail
Can I go to jail for owing money?
Will I go to prison for being in debt?
Debtor’s prisons were ended many, many years ago. However, the “stigma” of being in debt and going bankrupt does still remain. However, if you look at the numbers of those going bankrupt each year, the stigma is falling away and you may find yourself in good company.
In most instances, being in debt, or going bankrupt is not a crime. If the debt or bankruptcy is related to fraud, or a crime, this can be a different matter. A crime is a crime, debt and bankruptcy is not a crime.
There are rare, and I do mean rare, cases of someone being sentenced to prison or jail, after they have gone bankrupt. But this is related to fraud, fraudulently trying to hide assets from the oR and the bankruptcy, or breaking the restrictions under which a bankrupt is placed.
These instances are rare, and are related to serious offences.
What If I am a Creditor and Someone Owes Me Money?
When you are in debt and struggling, it may take years before you make the decision to go bankrupt. Many people struggle for years and years, trying to avoid the inevitable.
Once they do go bankrupt, they feel like a weight has been lifted of of them.
The stress of all the debt is now gone.
That is one perspective of going bankrupt, but there is another perspective; that of a creditor, someone who is owed money by a person going bankrupt.
If someone owes a large company or corporation, like a credit card company or a bank, and someone goes bankrupt, they do not usually feel sorry for the lender or bank.
They chalk it up to doing business, and may say, “they are so big, they can write that of”.
And maybe the bank can, but enough losses, and it impacts profits, shareholders returns, and the bottom line.
Which is why some lenders and banks have the interest rates they do based on risk and credit scores. The higher the risk and lower the credit score, the higher the interest rate for a loan.
Now what about the little guy, you, me, us?
What happens if someone owes us £1,000, or £5,000 or more, and they go bankrupt, what happens?
We are just another creditor, and may be a small fish, in a large insolvency pond.
Which means if there are any assets to be liquidated, we may be far down the line to get anything paid back to us.
We take a loss.
We lose our money.
Recently a “businessman” gave £180,000 to what he believed to be a “single, female, investment broker”.
She was female, but single and an investment broker she was not.
So a law suit was involved and the business was awarded his money back, but the lady in question went bankrupt.
The businessman’s attorney stated, “It is possible that if the bankruptcy is not set aside, she may get away without paying anything.”
So while bankruptcy as with any financial tool and procedure can be used by the dark side of the force, it is still an insolvency tool that many people may need to make use of to rid themselves of huge debts they cannot pay back.