Personal Bankruptcy Law

Countries around the world all have their own laws for individuals and companies filing for bankruptcy. In a legal sense in the UK, bankruptcy relates only to individuals and partnerships, but it has become the general term that we are all familiar with. Each year many thousands of individuals in the UK file for bankruptcy, with many more taking out individual voluntary arrangements with creditors.

Changes to personal bankruptcy law came into effect in April 2004 with the introduction of the Enterprise Act of 2002. Bankruptcy now, although subject to some restrictions, will free an individual of all debts in 12 months.

What is involved in personal bankruptcy?

Filing for bankruptcy is an extreme method for dealing with debts, and is always considered a last resort.

It is important to remember that there still are non dischargeable debts that will survive bankruptcy proceedings. These include secured debts, spousal support or child support payments, fines and penalties imposed by government agencies. The debtor still has the obligation to pay these debts and the creditor has every right to collect the debt.

There are many pros and cons involving personal bankruptcy law.

Many people chose this option as they get:

• Legal protection from creditors - all creditors are bound by and must accept the Bankruptcy order
• Most of the debt is taken care of on unsecured loans, tax and VAT bills, credit card and store cards, catalogue accounts and any unpaid bills.
• Free from the debt subject to county court judgements
• May get to keep your house, but if there is equity in your home, then your share of it may be claimed as part of bankruptcy.
• Can give you a fresh start

On the other hand it is important to remember that UK personal bankruptcy also means:

• Bankruptcy trust or an official receiver takes control of your finances
• You lose all your assets
• Severe effect on your credit rating for many years. Utility providers may require pre-payment for services.
• If you fall into financial difficulties again, and are made bankrupt by creditors, you will have to serve a minimum 5 years bankruptcy.
• Bankruptcy is always publicly advertised. Public notification will normally appear in your local newspaper containing details of your name, address and occupation.
• You may still have to make monthly contributions for up to 3 years at the discretion of the Official Receiver or Trustee in Bankruptcy.
• DTI will keep a record of the bankruptcy for up to 15 years.
• Restrictions on your financial activities. It is possible that you will be barred from practising some professions which could result in losing your job.
• The law doesn't allow you to be a director of a limited company.

As an alternative to bankruptcy many chose an Individual Voluntary Arrangement. The IVA is part of the Insolvency Act 1986 and allows a debtor to reach a formal agreement between the debtor and the creditors whereby you repay as much as you can afford, usually over 5 years, after which, any outstanding debt is written off.

IVA's were introduced by the UK Government in 1998 to be alternative to bankruptcy and is available for residents of England and Wales who have unaffordable debt repayments. IVA's are becoming an increasingly popular solution because an IVA is not advertised and generally all assets can be retained. Other benefits include:

• A large proportion of the debt may be written off and the interest is frozen.
• Ability to stay in control of your own finances and own income
• You will only pay what you can afford according to the terms of the arrangement.
• All contact from creditors should stop completely.
• You can continue running own business and can continue as a director of a limited company.

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