It’s an accepted and ever more common fact of life that many of us will have problems with debt at some point during our lifetime. However, sometimes the problem can be more serious as a result of over borrowing which can lead to a dangerous spiral of even more borrowing in a desperate attempt to resolve the situation.
This is never a good position to be in, particularly if you have responsibilities such as children and commitments such as a mortgage. If your debts get to the point where they become overwhelming and you can’t see a way that you can repay them then you may need to consider bankruptcy as a way out. Bankruptcy is not the only way to resolve debt problems but in the right circumstances it is an effective way out of debt.
Bankruptcy advantages and disadvantages
If you’re not completely sure on how bankruptcy works, the following explanation may help. Though it varies depending on the law in your area, bankruptcy broadly entails the following benefits:
- A proportion of your debts will be written off.
- You may be allowed to keep selected personal possessions, including a reasonable amount of cash.
- Your creditors must stop their court actions against you.
- You can make a fresh start financially free of debt.
For anyone with a substantial amount of debt, this can sound like an ideal solution with the idea of clearing your debt a particularly attractive aspect. However, there are important implications to consider if you decide to declare yourself bankrupt. It does depend on your own circumstances but you can expect the following downsides to apply if you declare yourself bankrupt:
- Assets may be sold to pay off debts, including your house or car
- Your job may be at risk, as certain professions require an employee with a good economic background
- Applying for loans in the future will be more difficult
- Your bankruptcy details will be available to the public
It can take time to process
Furthermore, the process can be time consuming, and expensive. Though it may seem counter-intuitive that you must pay a court fee, and a perhaps a solicitors fee too, at a time when you have very little disposable income this is something you must consider. It costs around £750 to declare yourself bankrupt. The process itself can take some time and you will be officially bankrupt for a year. If you own a business, it’s possible that it will have to be closed. It is therefore important to consider all eventualities before deciding on the bankruptcy route.
It’s an effective debt solution
Despite all these caveats, declaring personal bankruptcy can still be an effective solution for the borrower, as well as for the lender. Creditors have the option if certain criteria are met to apply to bankrupt the debtor, which may not be the desired outcome but in some cases can actually come as a welcome relief. The process will allow the creditor to have any assets liquidated in order to pay off the debt owed.
Bankruptcy therefore is very much a last-resort measure to resolve debt issues, and may not be the best option for either the lender or the borrower. For example, it may be better to seek a solution where assets can be protected and agreement can reached that is acceptable to all parties. However, if all else fails, the bankruptcy process is available to provide an effective legal solution in cases of serious debt.