Bankruptcy has been around probably since ancient times. While you are working so hard to make ends meet, there are times when everything seems so pointless. You always end up in debt at the end of each month. This is the reason why financial education is necessary. Bankruptcy should be the last resort so hear out the warning signs. Read on to find out more and we are also giving out some expert tips on how to avoid it.
Bankruptcy: A Deep Understanding
Bankruptcy originated from two Latin words which are “Bancus”, which means bench or table, and “ruptus” meaning broken. When a banker, who originally did his transactions on a table or bench was unable to continue lending, his bench was broken as a sign of failure and incapacity to negotiate.
For a normal individual, being in serious financial trouble is when he/she’s left with no savings but debts. The person resorts to borrowing again from family, relatives, and friends, lending companies or banks. Some sell their properties to pay back outstanding loans.
Legally, it is defined as the legal action involving a person, people, and businesses that are incapable of paying existing debts. It gives individuals or companies freedom from their debts while giving creditors options for repayment, like selling assets to be able to repay in partial or full. Unfortunately, it doesn’t cover all debts. It means that creditors can still take legal actions against you to take their money back. These include:
- Student Loans from SLC (Student Loans Company)
- Social fund loans
- Court fines
- Child support payments, including any lump sum orders or fees from family proceedings. In some cases, you may ask for a court order to not pay it.
- Secured loans and other secured loans like a debt secured with a charging order.
- Debts you owe because of the injury or death of a person. You may also ask a court order for you to not pay it.
- Any payments the court ordered you to pay under a confiscation order such as drug trafficking.
Types of Bankruptcy in the UK
There are a few types of bankruptcy in the UK. Each type applies only to individuals, an individual member of a partnership or a company.
INDIVIDUAL VOLUNTARY AGREEMENT (IVA): The individual agrees with the creditor to pay his/her outstanding debt in full or partial over time as an alternative to bankruptcy. There is a meeting between the creditors set by a licensed Insolvency Practitioner. If the proposal is accepted during the meeting, the agreement will now be legally binding or valid. The court issues an Interim Order that will immediately protect the debtor from any legal actions by the creditor.
COMPANY VOLUNTARY AGREEMENT (CVA): A company comes with an agreement with creditors to pay in full or partial over time. A representative of the company makes a proposal to pay part to the creditors in the meeting and if agreed, it will be legally binding and the directors retain their control over the company.
COMPULSORY LIQUIDATION: This is the winding up or dissolving of a company or a partnership by order of the court. A petition is usually filed by creditors stating that the company is not capable of paying its debt to them. The official receiver becomes liquidator but in case of the company having significant assets, the Insolvency Practitioner takes over. He/she weighs in the worth of the asset and pays first whatever fee is required from the liquidation then the creditors.
CREDITORS’ VOLUNTARY LIQUIDATION: The shareholders voluntarily submit an intent to dissolve the company without a court order. A creditors’ meeting occurs for the appointment of a liquidator and a committee who work together to realize the company’s assets and pay first whatever amount is needed from the liquidation and then the creditors.
ADMINISTRATION: Not all companies and partnerships can apply for this. It is intended to free the company from trouble and start its operation again. The court appoints an administrator after an application from the application of a creditor, director or partner of the company. The main task of an administrator is to save the company. If this is beyond possible, he/she will sell the company and pay the creditors.
Applying for Bankruptcy
You can file bankruptcy if you cannot pay your debts. You are required to submit a petition and fee before the court. It costs £680. The petition contains a sworn statement by the debtors regarding their total amount of debt, income, and expenses, as well as a complete list of their assets. A court hearing follows to review the information in the petition. In the UK, an adjudicator, who works for the Insolvency Service reviews your application. They will decide if you are a qualified bankrupt.
When the adjudicator makes you bankrupt, this is what happens:
- You will receive a bankruptcy order. An interview may follow.
- Your assets, in case you do, pay your debts.
- You have to follow bankruptcy restrictions.
- Your name and details are published in the Individual Insolvency Register.
Warning Signs of Bankruptcy
Debts cannot be ignored. If you are doing everything and nothing seems to be working to save yourself from bankruptcy, it is good to listen to the warning signs before it’s too late. Be aware of your current financial status. Here are lists of the red flags you should keep an eye on:
- Mortgage payments, whether your house or car, are more than one payment late.
- Your credit card payments start to fall behind.
- Your credit cards have reached their maximum amount.
- Your credit cards’ interest rates are increasing because you are late in your payments.
- You cannot save a single penny, not even afford to pay your daily expenses.
- The balance on your credit card continues to increase
- Creditors start harassing you by calling multiple times at home and even at work.
- Your debt is affecting your life. You cannot relax, eat and sleep.
- Bad things cross your mind, like stealing just to pay your debts or ending everything with suicide.
Debt-Free Life: How to Avoid Bankruptcy
As of June 2019, individuals in the UK owe £1.637 trillion. On average, every person spent £967 on interests alone in 2018, and 350 people declare bankruptcy in the country. If you are one of these people who struggle every day because of debts, look into these tips to avoid bankruptcy.
1. Eliminate Unnecessary Expenses
While most reasons for bankruptcy root from poor spending habits, there are times when it arises from some unexpected circumstances. So if you cannot avoid borrowing money, your goal should be paying your debts every month. Cut back unimportant expenses and make a serious sacrifice. Buying things that you don’t need for survival may wait until you pay off all your debts.
Things like going out for dinner, movies, expensive haircuts or unnecessary clothing should be your priority to eliminate. After, try reducing your food expenses, as well as utility costs. Moving to a smaller or cheaper house isn’t too much of a sacrifice. Opting for a cheaper car also helps a lot.
2. Your Debts are your Priority
You may think of paying your debts every month, but have you thought how? The problem with other people is they don’t plan. You need a plan on how to make repayments each month.
First off, allocate a budget for your daily necessities. Food, housing, utilities, transportation, and other legal obligations like child support. Then settle the debt with the highest interest. Pay the minimum on your necessities and other debts, and settle as much money as you can to the loan with the highest interest. After paying it off, move to the one with the next highest interest until everything is settled.
3. Negotiate with your Creditors
You should call your creditors as soon as you realized you are unable to pay your monthly dues. In some cases, they minimize the interest rates, adjust your due dates, or other ways to help you pay. And if you make agreements with credit or lending companies, stick with it. They may give you considerations next time.
Usually, credit card companies are willing to negotiate. So it’s better to pay off even if takes a while rather than filing bankruptcy.
4. Be Cautious of Debt Consolidation Loans
This may be a quick fix to all your financial woes. You get a loan with one monthly payment but if you acquire a home equity loan for this, your house is used as collateral. It may get you out of your predicament but it’s never a viable solution.
Why? You think you addressed the issue but didn’t see the underlying problems such as financial mismanagement. Always remember that borrowing money against your house to pay off debts poses a risk to lose it.
5. Avoid Debt Settlement Companies
These companies offer debt settlement services, in exchange for a profit. According to Consumer Reports, they negotiate with your creditors and ask for fees upfront, which can be up to 15% of your total debt. Most of the time, they don’t give you relief from your troubles but make it worse.
6. Go for Debt Management Services
If you saw the situation is out of hand and you need professional help, there are non-profit organizations that offer these services.
These organizations negotiate with your creditors to remove fees or at least lower interest rates. If the latter agrees, you can now pay your debts monthly and allocate to each of your creditors. Debt management services are not free but significantly lower than debt settlement companies. Typically it costs you $25 each month.
Under the debt management program, you are restricted from opening new accounts and at the same time receive counseling. Primarily on how to budget and starting to save.
As far as your credit score is concerned, if you participated with them honestly, they may decide to not report it to credit bureaus.
7. Always Remember that every Situation is Different
Every person got into financial trouble in different ways, as well as on how to get out of it. It’s always better not to declare bankruptcy so financial awareness, as well as other options to pay off debts, are important things to consider.