What are the effects of bankruptcy?

Bankruptcy can seem like an ideal solution to serious debt problems. A simple standard bankruptcy petition could, after all, effectively see you completely debt free after just 12 months. But, this is not something to be entered into lightly as bankruptcy can have both short term and longer terms effects on many different aspects of your life.

For example, if you declare yourself bankrupt (or are pushed into bankruptcy by your creditors) then your assets will be used to reduce/repay your debts. For many people this can mean losing their home, their car(s) and many of their possessions. You may also have to pay some of any income that you earn towards debt repayment during your bankruptcy period. Your bankruptcy petition will also be made public so you will not necessarily be able to hide the route that you have taken.

You will also generally find that you will not be able to use/control your existing bank account(s) and may have to open a new one with restricted facilities (i.e. no overdraft or chequebook) until your bankruptcy is over. In general terms bankrupts are restricted on what they can do in finance/credit terms. You cannot, for example, apply for more than £500 of credit (either yourself or in a joint application with somebody else) without telling the lender that you are undergoing bankruptcy. You will also need to let the trustee managing your bankruptcy know if you obtain any extra income or assets during your bankruptcy.

Bankruptcy may also affect your employment. For example, if you run your own business then it will often be shut down. You may be able to set up in business for yourself again but there are various restrictions and regulations to which you must adhere. And, some people in certain professions (i.e. legal and accountancy) will not generally be able to carry on working in their fields when they go through bankruptcy proceedings and you cannot hold a variety of public offices (i.e. as an MP or magistrate), be a director of a company without permission or act as a trustee in certain cases (i.e. of a pension fund or a charity).

Another issue to consider is the effect that being bankrupt can have on your credit history. This history is used to show lenders and other businesses how much of a risk you may be before they lend you money or let you take out certain financial products or contracts. The fact that your bankruptcy can appear on your credit history for at least six years can make it hard for you to get credit in the short-medium term once your bankruptcy is finished as you will be perceived as a high credit risk.

However, at the end of the day, once your bankruptcy is discharged you will be debt free. So, for many people, this is the most effective route to take if they can see no other way to manage their debts. It is wise to think hard about all the debt management solutions and options available to you before coming to a final decision here.