How Does The bankruptcy Process Work

If you have severe financial difficulties, the most extreme option available to you may be bankruptcy.  Before considering this as an option you need to be fully aware of what this option is and the consequences of becoming bankrupt.

Bankruptcy is considered to be one of the most extreme debt solutions and only an option if you have severe financial difficulties and cannot pay off the excessive amount of debt that you are burdened with. Before applying to be bankrupt and going down this road you must be made aware of how it works and what the outcomes are.

While there are certain advantages to becoming bankrupt – such as being free from debt with your assets shared fairly amongst your creditors – it should not be seen as the first and only solution. You will be required to give up valuable possessions, possibly even your home and your business – should you run one – along with all its employees.

How The Bankruptcy Process Works

Following a bankruptcy petition which is placed by either yourself or your creditors, a court has to make a bankruptcy order. This begins the process, from which point – whether you agree with it or not – you must engage with it fully. If your creditors presented the petition then the issue can still be resolved before the court gets involved; once it reaches the court however it is much more difficult, costly and time-consuming to stop the process.

Prior to all this, once you have provided Simple Financial Solutions with all the information we need, we should be able to have your petition ready within a few days. Once the bankruptcy order has been made the Official Receiver will give order of the notice in the London Gazette and other publications if necessary. Next, a court hearing date will be set involving just you and the bankruptcy clerk who will take you through the papers you need to sign and make you take an oath that all the information contained within the papers is correct to the best of your knowledge.  These papers are then sent to the judge who will declare you bankrupt.

What Happens After You’re Declared Bankrupt?

The Official Receiver will ask you about any assets and bank accounts that you may have.  They then have to give notice of your bankruptcy to a range of organisations including local authorities, courts, sheriffs, bailiffs, HM Revenue and Customs, utility suppliers, the Land Registry, banks, building societies, mortgage companies, pension companies and insurers to further investigate the full extent of your assets and liabilities.

Once you are declared bankrupt you will have a number of responsibilities. You must comply fully with any requests made by your Official Receiver, whatever they may be. You must also inform your Receiver of any changes to your financial circumstances whilst you are a bankrupt (e.g. inheriting money or property, or receiving a payment from a claim). You won’t be able to secure more than £500 credit without declaring you are a bankrupt nor can you make direct payments to your creditors. You must steer clear from using your bank account(s) from the outset – we can advise on choosing a new account though.

Looking ahead though, there is light at the end of the tunnel; after a maximum of 12 months, or even less in some cases, you will be free from bankruptcy.

How Does Bankrutpcy Work In Scotland?

Sequestration is the Scottish equivalent of bankruptcy and signifies a legal order which confirms to your creditors you are unable to repay the money you have borrowed. It is only available to people living in Scotland and the Certificate of Sequestration came into effect in November 2010, making it easier to proceed with your own sequestration.

The Low Income Low Asset (LILA) represents another route into sequestration and was introduced in April 2009. Both of these routes involve different qualifying criteria however advantages and disadvantages of sequestration are relevant to both.

If you are a resident of Scotland and in financial difficulty, Simple Financial Solutions can advise you on your next step. It may well be Sequestration however a Scottish Trust Deed or Debt Management Plan may be more appropriate; either way, we will only propose what is best for your situation.

Who is Sequestration for?

Sequestration could be for you if you meet the following criteria:

  • You owe at least £1,500 in unsecured debt
  • All other debt solutions wouldn’t help you resolve your situation
  • You will require ‘apparent insolvency’

To apply for sequestration a creditor must agree to make you bankrupt; this then gives you ‘apparent insolvency’ which means that you are unable to meet regular payments. Some form of legal action will be taken against you by your creditor, typically a Charge for Payment Order, a Statutory Demand or an Earnings Arrestment.

You will also need to consider the costs; £100 will be required to administer the sequestration, there will be court fees and you’ll also have to pay your Insolvency Practitioner (both an upfront fee and regular charges to look after your payments to your creditors on your behalf).

Advantages of Sequestration

The advantages of sequestration are similar to bankruptcy:

  • All regular payments to your creditors will stop, leaving your Insolvency Practitioner to deal with them from now on
  • Once your sequestration is completed (to the satisfaction of your Insolvency Practitioner) then you can start to get your finances back on track

Sequestration is backed by the Scottish Government so there is no need to feel ashamed by entering into it – thousands of people have been, and still are, in the same situation as you. The Sequestration Order was put in place to help people whose financial situation has reached breaking point. It is not a Debt Management Plan or IVA therefore no regular monthly repayments are required.

Disadvantages of Sequestration

Again, bankruptcy and sequestration share similar disadvantages:

  • Any spare cash that you may have each month will have to go towards your sequestration
  • Your house, car or other valuable assets may have to be sold
  • Your credit rating will be affected making it more difficult to obtain credit in the future (despite being discharged from your sequestration after one year a note will remain on your credit file for six years)
  • You cannot act as a director of a limited company