Bankruptcy is one of several types of personal insolvency. Other types of insolvency include Individual Voluntary Arrangements, Trust Deeds, and in Scotland, Sequestration.
The technical definition of insolvency is someone who is unable to pay their debts as they fall due.
Most bankrupts ‘petition’ the court for their own bankruptcy and there is quite a high fee for doing so. Creditors can also petition the court for bankruptcy and do not need to obtain a court judgment before doing so.
Once a person is declared bankrupt, his or her financial affairs are managed by either a Trustee or by the Official Receiver, who puts together a Statement of Assets and Liabilities, and then works out how much can be repaid to creditors. This is usually a small proportion of the amounts owing.
By law, bankrupts cannot be pursued for any debts that have been included in the bankruptcy, so one of the benefits of being declared bankrupt is to put a metaphorical umbrella up to shelter from the pressures of being chased for debt.
Bankrupts may not practice certain professions (e.g. lawyers and accountants).
A bankruptcy remains on credit reports for 6 years, whether discharged or otherwise. Lenders are permitted to lend small amounts to bankrupts (approximately £500) but few do. Most automatically decline bankrupts, whether the bankruptcy is active, discharged or settled, as it has proven to be a strong predictor of future financial problems.
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