Bankruptcy is brought about when an individual is insolvent and unable to pay their debts when they become due. A limited company will be deemed insolvent and can be wound up if it cannot pay its debts. There are therefore two distinct types of bankruptcy, personal bankruptcy and commercial bankruptcy or insolvency.The purpose of bankruptcy is to convert the assets, personal or business, into a lump sum for distribution between the creditors.

Either a debtor or creditor may apply for a bankruptcy order. The debt must be at least £750 and not be capable of dispute by either party. On the making of the bankruptcy order, all the debtors’ financial assets pass to the official receiver, and the debtor is subject to a number of financial restrictions.

Bankruptcy can enable people with severe debt problems to become debt free much quicker and may be a better solution than debt management, or an individual voluntary arrangement. A person who cooperates fully with the receiver can be discharged from bankruptcy and become debt free in no more than one year.

However, the principle of ‘can pay, will pay’ still applies. A bankrupt will still:

• risk losing their home and possessions, which will be sold to pay outstanding debts;
• face severe restrictions on their finances, such as getting a mortgage, bank account or future credit;
• have their bankruptcy advertised and recorded on a public register that anyone can search;
• make on-going payments to creditors where possible;
• face prosecution if they are found to be dishonest.

Individual voluntary arrangement (IVA’s)

An IVA is a formal legally binding agreement between an individual who is unable to pay his creditors and a licensed insolvency practitioner. The insolvency practitioner will put together a form of proposals to the creditors for approval and administer the IVA.

Normally, the debt must be over £25,000. On agreement, the creditors accept a reduced offer of repayment in full and final settlement of the debt. Payments are normally made over a five year period, following which the remainder of the debt is written off. All interest and charges on accounts are frozen