Pros and Cons of Bankruptcies UK in 2024

When looking into the various debt solutions available, you need to understand the pros and cons of bankruptcies UK. When you are unable to pay off your debts, a declaration of bankruptcy is an option available. This means that you no longer have the means to pay off your creditors.

But, before we jump into the list of pros & cons of bankruptcies in the UK, let us first understand what is bankruptcy, how long it lasts, and the 3 types of bankruptcies in the UK.

What is Bankruptcy? 

Bankruptcy is a legal process available to those who cannot afford to repay their accumulated debts within the period allotted. It is a type of insolvency that you can declare yourself. Additionally, you can also be declared bankrupt by your creditors. This is known as involuntary bankruptcy.

Pros and Cons of Bankruptcies UK:

Pros:

1. Get a Fresh Start:

You can only get a fresh start under Chapter 13 bankruptcy as long as the court agrees to cancel all the major expenditures. This is why debtors look to make reasonable payment plans even if they do not receive full payment.

2. Lasts Only For 1 Year:

The term for bankruptcy is only 1 year. During this period you need to make the regular payment or your expenses are placed under the financial control of the courts. After the said period, you can again gain control of your finances. In the overall scheme, 1 year is a short amount of time where you can again build yourself.

3. No Harassment Calls From Debtors:

According to the law, once you file for bankruptcy you are protected from any harassment by the creditors. They are legally bound to leave you alone. This includes taking any legal action against you, sending the bailiffs to your residence, or making any threatening calls.

4. Your Personal Possessions and Income Are Not Considered:

Most people think that filing for bankruptcy means that your possessions are owned by the courts. This is not true. You do not lose everything. The only items taken into consideration are the high-value items that are sold or auctioned to pay off your debt.

5. It Does Not Affect Your Partnerships or Family:

Filing for bankruptcy does not mean that it will affect your family’s earnings or those of your business. It is solely your debt that is considered. Your friends, family, and spouse are immune to any legal actions due to your debt. This is one of the biggest pros of bankruptcies UK.

Cons

When looking to file for bankruptcy, there are some cons involved. While you do get some respite, you do so at the risk of losing your high-value items such as your home. So, before you file for bankruptcy it is best to understand the cons involved.

1. You Cannot Purchase items

One of the biggest disadvantages of filing for bankruptcy in the UK is that you lose the ability to buy high-ticket items. Also, you may be refused certain services if the companies know you cannot pay them back. For example – once you file for bankruptcy, and cannot pay your electric bills, the company may stop providing you their services.

So, think about how these may affect your everyday life before you decide to file.

2. You Can Only Apply if You Earn Over a Specific Amount

Previously, one of the main clauses to filing for bankruptcy in the UK was that only those people who earn an income above £30,000 pa could not have their debts wiped away. But from 2014, anyone with disposable income can file for bankruptcy.

3. Not All Debts Get Canceled

Filing for bankruptcy, and getting a year off, does not mean all your debts are cancelled. Instead, only a part of your liabilities is eased off – which still leaves you with the remainder of the amount to be paid.

Loans that are not terminated by way of bankruptcy are:

1. Taxes owed to HMRC,
2. Educational loans,
3. Court fines,
4. Previous child support and maintenance.

4) Residential Loss is a Major Con of Bankruptcies in the UK

One of the biggest losses you will face when filing for bankruptcy is your house. Depending on your debt, it will be repossessed and sold. In case you are renting you will need to let your landlord know whether you can afford the rent. In most cases, landlords do not want tenants with bankruptcy issues and may ask you to leave.

5) Loss To Business

When it comes to loan collection, there is no fine line drawn between what can and cannot be repossessed. If your business or company assets are high-value, then in some situations they may need to be sold off to pay off your debt. This in turn becomes a vicious cycle as it forces your company or business to go bankrupt in the process.

So, whether it is feasible or not to declare bankruptcy in the UK should be thought through meticulously.

6) Damage To Credit

When you file for bankruptcy it ruins your name in the industry. Even though it may be personal and have nothing to do with your business – people will stop trusting you. That is when your credit gets ruined. Financial institutions will not want to back up any future endeavours if you have a bankruptcy filing in your previous years. The only way you can get out of this cycle is if you find a large guarantor who is willing to vouch for you and may have to pay higher interest rates.

7) Charges Apply

When you file for bankruptcy in the UK, you will be charged for the process. This includes court fees and any other services provided. All these will be taken from your repossessed assets.

8) Hamper Work Life

In case you work in a public office or practice certain professions like an accountant or a lawyer, then you will not be able to hold that job. Also, you will not be allowed to serve as a trustee of any fund.

9) Public Record

When you file for bankruptcy then all your financial details become a public record. They are visible to everyone including your future employers and banks in the future. This may be seen as a negative when you try to move forward post the 12 months of bankruptcy term.

FAQs (Frequently Asked Questions)

so, now, you have a basic understanding of the pros and cons of bankruptcies UK. Now, check out some of the most commonly asked questions that people often have when they are thinking about declaring bankruptcy or just researching the topic. Knowing these answers will give you a clearer understanding on bankruptcy in the UK. 

Q1: How Long Can Bankruptcy Last?

Bankruptcy usually lasts for only 1 year, but depending on the circumstances, it might be longer. After the declared bankruptcy period, all or most of the debts are written off and the status remains in a person’s credit file for 6 years.

Q2: Why Choose Voluntary Bankruptcy?

Two of the most common reasons why people declare bankruptcy are wiping off debts and having a fresh start. While a fresh start is one of the most commonly seen reasons for the declaration of bankruptcy, you need to consider the pros and cons of bankruptcies in the UK before going down that path.

Q3: What Happens if You File For Bankruptcy UK?

When you file for bankruptcy in the UK, all your non-essential belongings (such as property) and any extra income are forfeited to settle all the debts you owe. This is done over 1 year so that most obligations are cancelled out post-bankruptcy.

Q4: How Can You Declare Bankruptcy in the UK?

There are 2 ways to declare bankruptcy based on your income. The applications depend on your income – is it lower than £30,000 or higher than £80,000? If your income is between these two figures, then you need the Income and Expenditure Form.

Conclusion

Bankruptcy can be considered a way to wipe your financial distress away. But until you weigh the pros and cons of bankruptcies UK, it is not a decision that should be taken lightly. Keep in mind that this decision will not only affect you but will also affect your family in some way or the other. Only take this route if you have nothing else left. Otherwise, try finding other alternatives to help you through these tough times.

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