Neil DennisPoor Boris Becker. Once the boyish prankster of Centre Court – now the 49-year-old, three-time Wimbledon champion has been declared bankrupt by a London court.
It's a last resort, but declaring yourself bankrupt can be a solution if you can't find a way you'll ever be able to repay your debts.
Bankruptcy can help you clear your debts and make a fresh start, but there are many serious considerations that will stay with you for some time.
It is a decision that should not be taken lightly, and prison could await you if you wrongly declare yourself bankrupt just to avoid repaying debts.
When is bankruptcy a solution?
If the assets you own cannot cover your debts and your creditors are unwilling to enter into an agreement for you to repay over time at an affordable amount, then bankruptcy may be your only option.
If you own assets such as a house and car, these can be sold to pay off debts - Source: ShutterstockYou can apply to have yourself made bankrupt, or a creditor can apply to make you bankrupt, without your consent – the fate of Boris Becker, whose legal team fought in court to avoid this outcome.
Becker believed the sale or remortgaging of a property he owned would have covered his debts, but the creditor was not prepared to wait.
In the fourth quarter of last year, 2,853 bankruptcies were made on application from the debtor, while 957 were creditor petition bankruptcies.
When bankruptcy is not a solution
Here is an important point. Your house is an asset if you own it. Your car, jewellery and any luxury goods too – these assets can be seized and sold by the court [usually a court appointed receiver or insolvency practitioner] to repay creditors.
So, if your assets are worth more than your debts, bankruptcy is not the best option for you.
Debt charity Step Change, says: "Bankruptcy should not be taken lightly as it is a big step and any assets you own, such as your car or house, will usually be sold."
Let's take a closer look at the positives and negatives of bankruptcy.
Bankruptcy can affect credit ratings for many years - Source: ShutterstockPositives
· You get to make a fresh start
· You can no longer be contacted by your creditors
· Money you owe is written off
Negatives
· You remain bankrupt for a year – if you try to borrow more than £500 you must let your creditor know you are bankrupt
· Bankruptcy stays on your credit file for six years, making it almost impossible to get a loan
· If your income is high enough you'll be required to make contributions to your creditors under an income payments agreement
· Assets [car, house, etc] will be sold
· Some professional bodies disqualify bankrupts
· Bankruptcy can affect your immigration status
· If you own a business it is likely to be closed and assets sold
Who's going bankrupt?
Although we hear of companies going bankrupt, the term officially only applies to individuals in the UK – including sole traders and partnerships. Companies enter into different procedures – liquidation or administration.
In 2016, there were nearly 91,000 individual insolvencies – up 13% from 2015, although it was the second-lowest number of insolvencies in 11 years.
As an example of the ratio of personal bankruptcies, in the third quarter last year 907 were for self-employed people, while 2,956 were other individuals.
Bankruptcy: before, during and after
Applying for bankruptcy, called a "debtor's petition", costs £680 – £130 to the adjudicator and £550 to the official receiver.
The reason why so few creditors apply to make their debtors bankrupt is because the fees on this side are much higher. So, they really need to be sure your assets can cover what you owe them.
You don't have to go to court if you petition for bankruptcy. Submit an online form and an official adjudicator will notify you of the decision and you'll be made bankrupt that day.
During your bankruptcy your name will be published in the Gazette, an official record of insolvencies in the UK, and will appear in Google searches of your name.
You'll be discharged of your bankruptcy after a year and your debts will be clear.
Remember, however, your credit rating is damaged – the bankruptcy stays on your file for six years.
James Jones at Experian says build up some positive information as soon as possible - Source: ExperianRepairing the damage
James Jones at Experian suggests that to help repair your rating, try to obtain some credit facilities as soon as possible.
"If you don’t do this, when the bankruptcy goes you’ll be left with an empty credit report, which won’t help you at all."
Get a credit card aimed at people with damaged credit histories, he says, "then use it to build up some positive information".
He suggests adding a mobile phone contract and other visible regular payments.
Avoiding bankruptcy
Alternatives to bankruptcy exist but, of course, they all involve repayments.
An individual voluntary arrangement (IVA) is a formal arrangement between debtor and creditor to make affordable payments over a fixed term.
An IVA will affect your credit rating in the same way as bankruptcy, however.
The IVA Advisory Centre says: "With bankruptcy your home will be at risk. IVAs can be a good alternative to look at if you're a homeowner, as you won't have to sell you home if you start this solution."
