Bankruptcy is a legal procedure whereby an insolvent individual may address the fact that he or she is unable to pay their debts. Through this procedure, the debtor can have his or her debts fully or partially written off within a finite period of time. A creditor may petition the court for the debtor’s bankruptcy or the debtor may petition the court for their own bankruptcy. The cost of initiating this procedure is currently about £600 in England, Wales and Northern Ireland.
Responsibility for addressing the debts of the bankrupt person falls to the Official Receiver who may appoint a Trustee to undertake the task. The assets of the bankrupt individual are sold and the proceeds are used to pay the further fees and costs of the bankruptcy process and, with any funds remaining, to repay creditors. Assets normally include property such as a house or land or a car. The debtor would be allowed to retain reasonable household items such as clothing, bedding, household equipment and other such basic living necessities. A low value car may also be retained if necessary for driving to work or for essential family transport needs.
The bankrupt individual may also have to contribute his or her disposable income for up to three years via an Income Payments Order (IPO) or an Income Payments Agreement (IPA). Discharge from bankruptcy occurs within one year (unless the debtor has been bankrupt before or has been found to have acted fraudulently or has failed to co-operate with the Official Receiver or the Trustee). Notwithstanding the one year discharge, the IPO or IPA continues for three years. The debtor’s credit file is also affected negatively for six years from the date of default, which often coincides with the date when the bankruptcy commenced but can precede that date. When the six years have elapsed, records of defaults are removed from the debtor’s credit files and he or she can begin to restore their credit worthiness.