Personal bankruptcy is the bankruptcy of an individual. Contrary to opinion, the aim of most creditors is not to make an individual bankrupt, those creditors who speak of bankruptcy usually do so as a tactic to scare you into repaying your debt. Creditors don't want to bring bankruptcy upon you because there is very little in the way of compensation for an unsecured creditor in a bankruptcy (i.e. they will never regain the majority of your debt).

Typically, a bankruptcy will be petitioned by a Government service or by the debtor themselves, as a means of ending the nightmare of bad debt problems.

What is the purpose of bankruptcy?

The purpose of bankruptcy is to convert your possessions, and any wages you receive, into lump sum and instalment payments for creditors. A debtors purpose to apply for their own bankruptcy is to form a moratorium (a group of creditors) to agree part repayment of all outstanding debts, and when the agreed repayment has been met, to have a 'clean slate'.

What does a bankruptcy order mean?

A bankruptcy order means that an individual creditor cannot make a claim against you, all claims must be made via the trustee (the person who controls the bankruptcy), otherwise the debt is written off.

How long does a bankruptcy typically last?

A bankruptcy will normally last until the third anniversary of the bankruptcy order. During this time you cannot hold public office or be a business director and you cannot apply for credit over £250 without notifying the lender of your bankruptcy.

Your credit file will show your bankruptcy for six years from the bankruptcy order.

Is a voluntary arrangement an alternative to bankruptcy?

A voluntary arrangement is a contract between you and your creditors, where you pay a monthly sum over a set period. The total is divided up between your creditors, who accept this sum in settlement of your present debt.

The advantage of a voluntary arrangement is that settle your debt problems without having to declare bankruptcy. A voluntary arrangement is legally binding too, meaning that once the agreed terms have been satisfied you have no further obligations to your creditors.

Unlike bankruptcy, a voluntary arrangement does not affect your employment or business status and is not widely advertised.

How can I avoid bankruptcy?

If you have bad debt problems and are heading towards bankruptcy one solution is to enlist the services of a debt management company.

A debt management company will evaluate your personal finances and debts and develop a financial plan which not only repays your debts but also allows you to live a reasonable life.

Successful debt management can help get your finances on track and stave off the threat of voluntary arrangements or bankruptcy.