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According to the Administrative Office of the U.S. Courts, approximately 1 in 212 Americans file for bankruptcy every year. And in the UK approximately 104,000 adults do the same.

Is bankruptcy a last ditch effort at staying afloat or a wise financial move? The answer to that question depends on your personal financial situation. Because there’s so much misinformation surrounding insolvency, let’s first cover what bankruptcy is (and isn’t).

Bankruptcy Basics

In a nutshell, bankruptcy is a way to protect you against your creditors if you’re not able to pay your debts. For example, if you have £250,000 in debt and only make £25,000 per year it’s unlikely that you’ll be able to meet you monthly payments. In this situation it may make sense to consider bankruptcy.

While being “free” of your old debts can sound appealing, bankruptcy is a serious decision and has important downsides to be aware of. The first of which is that your assets can potentially become sold off by the bankruptcy Trustee (Official receiver) so that your creditors can recoup some of the monies owed. Generally speaking, if you have a car that’s worth more than £2,500, you will likely lose it and be advised to buy a cheaper car. If owning a car is absolutely necessary for you to get to work, or pick up your children (and you don’t live around major public transportation links), then in some cases you can be offered a chance to buy back the car.

As for property, if you own your own home and it is in positive equity, then it is almost certain that you will lose it. In some cases, people facing bankruptcy are trying to hang onto their home, knowing full well that they will struggle to maintain payments anyway, and allowing the home to be repossessed can work out for the best.
If, however, your home is in negative equity, then the Official Receiver will keep tabs on its value over the next 3 years. Even though you can be discharged from bankruptcy in as little as 12 months, the Official Receiver will continue to check if your property comes into positive equity for at least two years afterwards, and if it does, it will be repossessed and sold for the benefit of your creditors. Providing it stays in negative equity it is likely you can keep the property.

As for things such as bedding, clothing and white goods, none of this is at risk. No one comes to your house to take the clothes off your back. When it comes to bankruptcy the assets the courts really care about are vehicles, houses/apartments and land.

A bankruptcy filing is akin to a black eye on your credit report for the next 7 years. It is highly unlikely that you will be able to obtain any credit during the term of your bankruptcy (if you’re a first-time bankrupt, this is 6-12 months), and it will be challenging to say the least to obtain credit during the years following. The credit that will be available to you will have a high interest rate and it is only advised that you obtain such credit if you are 100% certain you can pay off whatever you spend each month, as this will actually help you rebuild your credit score.

Finally, any extra income you bring in will likely become “garnished” in what’s called an Income Payment Agreement or an Income Payment Order. In other words, it will be taken out of your paycheck like a tax in order to pay down your debts during the term of your bankruptcy. If you don’t make much money and have a large amount of debt then little can be taken form your wages; but if you’re a high earner, expect to have your surplus income (salary minus expenses) taken from you. However, for many people, this is preferable to having a debt hang over their heads that they’re not able to pay.

Once you’ve made the decision to file for bankruptcy, you need to make it official by going to court and filing your claim. You can do this yourself, but as it is a stressful time, certainly not made easier by relentless creditors contacting you, it may make sense to look into contracting the services of a professional bankruptcy service.

Generally, a specialist bankruptcy company will be able to stop the creditors from calling you at home or at work, advise you on how to deal with bailiffs (rule of thumb: don’t let them in!), complete all of the necessary paperwork, and in cases where you can’t personally appear at court, they can appear on your behalf if you grant them power of attorney.

Is This Your Best Option?

The best way to determine whether or not bankruptcy makes sense for you is to consult with a financial professional. Because they’ve dealt with hundreds of cases before they’re able to give you a professional and experienced perspective on your financial situation.

Here are some general guidelines to give you some guidance today:

Are You Hanging onto Assets?: If you owe a large sum, but still have an expensive car, you really should sell the car off and pay your creditors. If you file for bankruptcy your car will be taken from you if it’s worth more than £2,500.

Can You Still Negotiate?: Many people in financial turmoil don’t attempt to reach out to their creditors and negotiate. You’d be surprised how flexible and accommodating banks, lenders and credit card companies can be when you explain your situation. Remember: they want you to pay off your debts as much as you do.

Will You Need to Borrow?: If you’ll need to borrow money for your education, a new house or a car then you definitely don’t want to go bankrupt. Bankruptcy is akin to getting blacklisted by creditors for at least a few years, even for small loans and credit cards.


The decision of whether or not to file for bankruptcy isn’t easy. Get in touch with a professional planner today so you can make the best decision for you.


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