Disadvantages Of Bankrputcy

Disadvantages of Bankruptcy

This page was last updated in July 2022. 

Disadvantages Of Bankruptcy in 2022

Bankruptcy is a process governed by the bankruptcy act that lets a debtor to get out of unmanageable debt circumstances, often at the expense of their assets. 

As such, it comes with a number of advantages and disadvantages, which you ought to know before submitting a bankruptcy application.

In general, there can be serious and complicated consequences of bankruptcy. It should only be used if you have a specific financial history and as a last resort when all other possibilities have been investigated. 

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What is bankruptcy, and how does it work?

Under the bankruptcy act of UK law, there are two main types of bankruptcy – individual and corporate. 

Corporate bankruptcy is when a company is unable to function financially and has to close down and sell its assets. This type of bankruptcy is known as liquidation. Individual bankruptcy is also known as personal insolvency. 

When you go bankrupt, your assets are sold off to pay your creditors. This includes your home, possessions, and any money you have in the bank. The money raised is used to pay off as much of your debt as possible. After someone is made bankrupt, they are released from most debts to creditors. 

In most cases, bankruptcy will last for one year. After this, you’ll be released from most of your existing debts to creditors. However, there are some payments that you will remain responsible for after that date, such as student loans, child support payments, and fines.

Bankruptcy should only be considered as a last resort for people in certain debts and difficult circumstances. This is because it can have a major impact on your life and property, both in the short and long term. 

Submitting a bankruptcy order should not be taken lightly as it can have a lasting impact on your life and assets. Before you decide to go bankrupt, you should speak to a debt advisor to see if there are any other options available to you. 

How might becoming bankrupt affect you?

Will it affect my job?

If you work for someone else, your employer can’t sack you just because you’re bankrupt. However, some employers may be reluctant to employ someone who has been through bankruptcy.

Will it affect my home?

You may be able to keep your home if you can continue making the mortgage payments. However, if you can’t afford the payments, your home will be sold alongside your assets and the money used to pay off your creditors. 

If you rent your home, your landlord may be able to evict you if they find out you’ve been subject to a bankruptcy order.

Will it affect my assets?

Your possessions may be sold to pay off certain debts to your creditors. However, there are some assets that can’t be sold, such as tools you need for work or your clothes. There are certain exceptions. 

You may be able to keep items that are financed by monthly payments, such as a car if you continue making the payments.

What are the advantages of declaring bankruptcy?

There are a number of bankruptcy advantages which might make it a fresh start if you are a debtor unable to see your financial situation improving in the near future. 

Once you’ve been declared bankrupt, most of your existing debts will be cancelled and you’ll no longer have liability for paying your creditors. This might allow you to rebuild your credit rating and increase your finances over time. 

If you’re experiencing harassment from a creditor or even facing a legal issue, bankruptcy can provide some relief. 

Once you’ve been declared bankrupt, your creditors will no longer be able to contact you and they’ll be prevented from taking any legal action against you. If you’re able to continue making payments on your mortgage or car loan, you may be able to keep these items.

What are the disadvantages of being declared bankrupt?

There are a number of disadvantages of bankruptcy, which can have a lasting impact on your life in both the short and long term.

You may lose control over your business operations and income

From the date of your bankruptcy period, you essentially give up control over your business to the court, even if you are a company director. This means that the court can sell off your assets, close down your business, and make other decisions about your business without your input.

If you file for bankruptcy, the court may require you to give up your business. If you’re a shareholder in a corporation that files for bankruptcy, you may also lose control of the company. 

This can be a major disadvantage if you’re attached to your business or if you believe it has the potential to turn around. If you gain special permission from the court, you may be able to remain as a company director.

bankruptcy disadvantages

You have to follow certain restrictions

You must perform certain duties while you are bankrupt. These controls are known as ‘restrictions.’ They concern things like your job, your money, and how you interact with the person who handles your bankruptcy, a bankruptcy trustee also called the ‘official receiver’.

The bankruptcy trustee can claim property from the debtor; the trustee can also ask them to pay part of their salary to the bankruptcy trustee in monthly payments. 

If a debtor does not co operate with the trustee (by, for example, excluding notifying details of earnings from the trustee), you may be required to follow further limitations or remain bankrupt for a longer period of time. 

You might also get charged with a bankruptcy offence by your official receiver. A bankruptcy offence is a criminal offence, and you may be subject to legal action.

"Bankruptcy is a process governed by the bankruptcy act that lets a debtor to get out of unmanageable debt circumstances, often at the expense of their assets. "

It won’t erase all unsecured debts or joint debts

Bankruptcy may help you get rid of most debts, but you will retain liability for certain debts, including joint debts. You will still be considered liable for paying back any debts that aren’t included in your bankruptcy, such as student loans, child support payments, and taxes.

If you have joint debts or joint-equity, your partner will remain liable for the full amount. And while you are bankrupt, you may be asked to make pay contributions towards certain debts if you have money leftover. This can be a major disadvantage if you’re hoping to use bankruptcy as a way to get out of all your debt and joint debts. 

advantages of bankruptcy

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If you have good credit, it will likely take a temporary hit

While bankruptcy may help you get rid of most debts, it will likely take a toll on your credit score. This can be disadvantageous if you have good credit and are hoping to maintain a high credit score. 

A bankruptcy filing will remain for up to 10 years on your credit report. This can make it difficult to get loans or credit cards during that time, and in the future it obtaining credit may be difficult.

If you declare bankruptcy, you may be required to undergo credit counselling. This may be a major disadvantage if you don’t want to participate in credit counselling or if you believe it won’t be helpful.

You can lose certain types of property or assets

If you file for bankruptcy, you may have to give up some of your property, assets and equity in order to repay a creditor. This can be a major disadvantage if you’re attached to your property or if it’s essential to your livelihood. 

If you have equity in any property, you may have to sell it in order to repay your creditors (although it is only your share of the equity which is subject to controls). You may also have to give up other types of property, such as jewellery, cars, or boats.

You may lose privacy, and some people may view you differently

Another disadvantage of bankruptcy is that it becomes a public record and certain debts will be public too. This means that anyone who searches for your name in court records could discover your bankruptcy status.

consequences of bankruptcy

Once you have bankruptcy status, some people may view you differently. They may see you as someone who is irresponsible with money or as someone who is not to be trusted. This can be a major disadvantage if you’re hoping to maintain good relationships with family, friends, or business associates.

You may have to pay taxes on forgiven debt

If you have debt that is forgiven, you may be taxed on that debt. This could be a major disadvantage if you were hoping to use bankruptcy as a way to get out of all your debt.

You may be unable to qualify for certain types of loans

During your bankruptcy period, you may be unable to get approved for certain types of loans. This can be a major disadvantage if you’re hoping to use a loan to finance a major purchase.

Bankruptcy can be stressful and expensive

The bankruptcy process can be stressful and time-consuming. You’ll have to keep track of your income, debt and finances and gather all the necessary paperwork. 

You may have to deal with court appearances, meetings with creditors, and the possibility of losing your property, as well as be responsible to your official receiver. This can be a major disadvantage if you’re not prepared for the stress of bankruptcy.

Declaring bankruptcy can be a costly process, both in terms of the money you’ll have to pay to file and for a lawyer to deal with any legal issues. You may have to pay court fees, attorney’s fees, and other costs associated with the bankruptcy process. This can be a major disadvantage if you’re already struggling to make ends meet.

It is possible to qualify for a free bankruptcy, but there are certain restrictions. To do so, you must receive Universal Credit, Child Tax Credits and State Pension Credit. You may also qualify if you are receiving other kinds of income-related benefits.

consequences of bankruptcies

Some bankruptcies are denied

There’s no guarantee that your bankruptcy will be approved. If your income is above a certain level or if you have surplus income, you may not be able to file for bankruptcy. 

This can be a major disadvantage if you make too much money to qualify for bankruptcy but don’t make enough to fulfil your debts. If your bankruptcy is denied, you’ll still be responsible for repaying your debts. 

How can you avoid bankruptcy disadvantages?

Try to negotiate with your creditors

You may be able to reach an agreement that will allow you to pay off your existing debts without having to file for bankruptcy. This can be a major advantage if you’re hoping to avoid the negative effects of bankruptcy.

Consider alternatives to bankruptcy like debt consolidation

There are a number of options available that may be more advantageous than bankruptcy, such as debt settlement, debt consolidation, or credit counselling. Be sure to speak with a financial advisor to see if these options are right for you.

Make sure you understand all the advantages and disadvantages

Before you make the decision to file, make sure you understand the bankruptcy advantages as well as disadvantages. Be sure to speak with an attorney or financial advisor about the potential consequences of declaring bankruptcy.

effects of bankruptcy

What to do if bankruptcy isn’t right for you

Declaring bankruptcy has a number of advantages and disadvantages and therefore may not be the best solution for everyone so don’t hesitate to explore other options before you decide. 

Although it may offer some advantages, there are also a number of disadvantages of bankruptcy that you should be aware of before you make the decision to file. 

If you’re not sure whether bankruptcy is right for you, be sure to speak with an attorney or financial advisor about your options. There are a number of alternatives to bankruptcy that may be more advantageous in your situation.

Some alternatives to bankruptcy are debt settlement, debt consolidation, and credit counselling. 

These are only some of the alternatives that are available to you. Be sure to speak with a solicitor or financial advisor about your options before making any decisions. 

Whatever you do, don’t decide to submit a bankruptcy application without first understanding all the advantages and disadvantages, as well as the potential consequences of bankruptcy.

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Article author

Katy Davies

I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch.   I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.

Outside of work, I love the snow and am a keen snowboarder.  Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.

Email – katy@helpandadvice.co.uk

Frequently Asked Questions

Will it affect my job?

If you work for someone else, your employer can’t sack you just because you’re bankrupt. However, some employers may be reluctant to employ someone who has been through bankruptcy.

Will it affect my home?

You may be able to keep your home if you can continue making the mortgage payments. However, if you can’t afford the payments, your home will be sold alongside your assets and the money used to pay off your creditors. 

If you rent your home, your landlord may be able to evict you if they find out you’ve been subject to a bankruptcy order.

Will it affect my assets?

Your possessions may be sold to pay off certain debts to your creditors. However, there are some assets that can’t be sold, such as tools you need for work or your clothes. There are certain exceptions. 

You may be able to keep items that are financed by monthly payments, such as a car if you continue making the payments.

You may be unable to qualify for certain types of loans

During your bankruptcy period, you may be unable to get approved for certain types of loans. This can be a major disadvantage if you’re hoping to use a loan to finance a major purchase.

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