What Are the Pros and Cons of Bankruptcy?

Bankruptcy is a much-feared but widely misunderstood insolvency procedure, which actually serves as one of the best routes out of debt in the UK. It can put a firm end to your spiralling financial worries.

That being said, bankruptcy is still a serious decision. Whilst it does offer a path to a better future, bankruptcy also carries some negatives that must be duly considered.

So what are the advantages and disadvantages of bankruptcy? And is it a suitable choice for you?

What Are the Advantages of Bankruptcy?

Peace of Mind

Struggling with personal debt can be an overwhelming and stressful experience. It can be hard to enjoy your day-to-day life when you’re being bombarded with demand letters, calls from unknown numbers, and threats from creditors.

Declaring bankruptcy brings a firm end to these worries; creditors will no longer be able to contact you, threaten you with legal action, or pursue debt collection efforts. Additionally, all interest and charges will be frozen, so you’ll no longer have to worry about your situation getting worse.

Your Debts Will Be Written Off

By far the biggest advantage of bankruptcy is its ability to erase your debt. After just 12 months, all of your outstanding debt will be written off.

This grants you the opportunity to start anew with your finances, helping you towards a healthier financial future.

Bankruptcy Is Quick Compared to Other Insolvency Procedures

After you declare bankruptcy, you spend 12 months as an active “bankrupt”. This places certain restrictions on you and your finances while in effect.

However, compared to other insolvency procedures, this is a fairly quick process. Other insolvency procedures, such as IVAs, are more drawn out, lasting up to 5 years.

What Are the Disadvantages of Bankruptcy?

You’ll Have to Surrender Your Assets

By far the biggest downside to bankruptcy.

You’ll have to surrender all of your valuable personal assets, including your home and your vehicle. Personal belongings such as your clothes and homeware will be unaffected, although you might have to surrender expensive items such as jewellery.

You may also be able to keep your vehicle if you can prove it’s necessary for your job. However, if it’s a luxury vehicle, you’ll probably be asked to exchange it for a modest one.

If you don’t have many personal assets this might not affect you.

Will Bankruptcy Affect My Home if I Rent?

If you rent your property, you won’t be evicted and your landlord won’t be informed unless you fall into arrears. Your landlord may be able to find out that you’re bankrupt if they request a credit check. Whether or not this will affect your tenancy is up to your landlord’s discretion.

Negatively Impacts Your Credit Score

While you’re only actively classed as a “bankrupt” for 1 year, your bankruptcy will remain on your credit record for 6 years.

This will make it very hard to take out loans or credit payment agreements. Any loans you do take out will probably be subject to eye-watering interest rates. This is because you’ll be classed as a high-risk lender.

However, this isn’t necessarily a bad thing. Difficulty obtaining credit can make it easier to avoid getting into debt again in the future, allowing you to remain debt-free.

There Are Restrictions While Bankrupt

For the year the bankruptcy is in effect you’ll be bound by certain restrictions:

Cannot borrow over £500 without disclosing you’re bankrupt
Cannot have an account with an overdraft or potential for credit
You’re not allowed to act as the head of a company or be a charity trustee

Failing to abide by these restrictions can result in you being struck with a Bankruptcy Restrictions Order (BRO) or a Bankruptcy Restrictions Undertaking (BRU). These impositions can extend the active bankruptcy period for up to 15 years. They’ll also place additional restrictions on you.

Expensive Application Fees

Bankruptcy costs £680 to apply for – when you’re in a lot of debt, this can be hard to pay.

You can pay in instalments, but the entire amount will need to be covered before the application can go ahead.

Those who are unable to raise the funds may be able to get a grant or help from a charity. Alternatively, you could qualify for a Debt Relief Order (DRO).

Is Bankruptcy Right for Me?

Entering into a formal insolvency procedure such as bankruptcy is a big step to take. Making the wrong choice could be costly.

Before making any hasty decisions, you should consult with an insolvency practitioner to figure out what is the right choice for you. Bankruptcy might be the right choice for you, or you may be better suited to another solution such as an IVA.

Our expert team can assess your situation and guide you to the best possible outcome. Get in touch to book a free consultation today.