Bankruptcy is a legal arrangement where someone who is unable to pay off their debts is able to make a fresh start by declaring bankruptcy. Bankruptcy means that you are no longer obliged to pay your debts. However, your assets have to be distributed amongst your various creditors and there are strict criteria about how much you can earn and borrow for a certain number of years.
Bankruptcy proceedings can be started by a voluntary agreement – when the individual wants to become bankrupt or by an involuntary agreement. This is when a creditor starts bankruptcy proceedings to get some of the debtors assets.
Bankruptcy can also be applied to someone who is part of an IVA order.
In the UK people who have declared bankruptcy cannot become company directors. Although there is a problem of people declaring bankruptcy, writing off their debts and then setting up a company in someone else’s name.
Advantages of Bankruptcy
- It enables a heavily indebted person to clear off their debts and make a fresh start.
- It enables the chance to become debt free within a year.
Disadvantages of bankruptcy
- Stigma attached
- Limits future activities such as becoming company director of justice of the peace
- There may be other alternatives such as an IVA