So I’m sure most of us have read that a certain famous rapper has filed for bankruptcy in the US. His lawyers are assuring the world that it’s just business as usual HOWEVER sadly that wouldn’t really be the case if you were made bankrupt in the UK. Here’s a quick post to clarify what bankruptcy means under UK law.
To be made bankrupt, a court has to issue a bankruptcy order against you. This can happen in 3 ways:
- you apply to the court because you are unable to pay your debts and want to declare yourself bankrupt;
- your creditors (the people you owe money to) apply to make you bankrupt if you owe them £750 or more (yup as little as that); or
- an insolvency practitioner applies to make you bankrupt because you broke the terms of your Individual Voluntary Arrangement (an agreement with your creditors to pay all or part of your debts, the insolvency practitioner manages the payments you make under the agreement).
If any of the above occurs, the Court will issue a bankruptcy order and the following will take place:
- you will receive a copy of the bankruptcy order and may be interviewed about your situation (this helps the Court to determine what assets you have to pay your creditors);
- your assets will be used to pay your debts (this could include your car, your income and your home although there are circumstances when assets are exempt, such as items of equipment which you need to use personally in your employment or business);
- you will have to follow rules called ‘bankruptcy restrictions’ (these rules, amongst other things, stop you from borrowing more than £500 without telling the lender you’re bankrupt, acting as a director of a company, and creating, managing or promoting a company without the Court’s permission); and
- your name and details will be published on a bankruptcy register called the ‘Individual Insolvency Register’.
After 12 months you’re usually released from your bankruptcy restrictions and debts. It seems grim but sometimes bankruptcy is a way for individuals to get their finances back on track. Bankruptcy only applies to individuals. Limited companies that can’t pay their creditors are ‘insolvent’ and can face compulsory liquidation which is a topic for another post.
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