Bankruptcy Can Be the Best Way Out of a Bad Situation

Bankruptcy is nothing more or less than a legal status that means you cannot afford to pay back your debts. But the word is fraught with emotional as well as legal significance, and deciding whether or not to declare bankruptcy can be difficult not only from a practical standpoint but also from an emotional one. Bankruptcy can seem scary, but it can be the pathway to a new beginning.

It’s not the end of the world.

Consider the case of forty-year-old Carli Burke, who lost everything when she went bankrupt in 2007. Eight years later, she’s flush again: she has a full-time job and a successful business, and she is working to secure a £200k mortgage.

As is the case with millions of UK consumers, unmanageable credit card debt and a family illness got Ms. Burke into trouble in the first place. Her debts mounted after a divorce and ultimately she was advised to go bankrupt. She has spent the years since then meticulously restoring her credit file, partly by rebuilding a borrowing record through the use of high-interest credit cards and loans. She makes no bones about it being a slow and tedious process – but the lesson is that it’s doable.

If new rules that took effect earlier in 2015 had been in effect back in 2007, Ms. Burke might not have had to resort to bankruptcy. The new rules stipulate that you must owe at least £5,000 before your creditors can force you to be “declared” bankrupt; previously the limit was £750. This is the first time that limit has been revised since 1986.

The new bankruptcy rules were designed to make things easier for financially troubled people who previously had no recourse when debts became unmanageable. One change is that it will become harder for lenders to force you to file for bankruptcy over relatively small debts. It will also be easier to access other schemes to resolve debts that do not involve bankruptcy and a trip to court.

For instance, a “debt relief order”, which is a lower-cost alternative to bankruptcy, was previously only available to people with debts of £15,000 or less. It is now available for debts of up to £20,000. Edward Ware of the problem debt advice charity StepChange said that the changes are welcome news. “This now means creditors can’t try to pursue bankruptcy for relatively small debts,” he said.

Currently it costs £705 to go bankrupt, including court fees. The year-long status is recorded on a public database and your bankruptcy is included on your credit file for six years. By contrast a debt relief order costs just £90 with a three month-long status, though that is also publicly recorded, with the same six-year note on your credit history. (In rare cases, bankruptcy can last up to 15 years if a borrower was found to have acted dishonestly, e.g., taking out a loan fraudulently.)

Both bankruptcies and debt relief orders still require you to repay some or all of your debts according to agreements made with creditors. And because the information is public, anyone can find out about it. Still, either option may be much less costly, both financially and emotionally, than the alternatives.

What if you need a loan whilst still in bankruptcy?

For many people bankruptcy is a rather rude wakeup call: a reminder that they need to be painstaking with their money management, even if they previously were not. Under the agreements of bankruptcy you’ll be required to live within a fairly strict budget, though you should have enough to cover all of your basic living expenses. But if you are still struggling to make ends meet, or you have an unexpected financial emergency, you may feel the need to borrow money.

It isn’t illegal to borrow money whilst you’re bankrupt, but you can’t borrow more than £500 without telling the lender about your bankruptcy. You will also find that it is almost impossible to borrow money through a conventional lender.

In that case a short term, high-interest payday loan might be a solution, since no credit check is required. But there are a few caveats, the most important being that under the terms of your bankruptcy agreement it may be extremely difficult for you to repay the new loan. Your “reasonable living expenses” budget most likely will not allow any slack for paying back additional debt. A new loan taken while you are bankrupt cannot be added to your bankruptcy arrangement, and if you miss a payment on that arrangement in order to try to repay the payday loan, your bankruptcy could be extended. You might end up in worse shape than you were when you started.

If you do have a means of paying back a short-term loan and you’ve decided a payday loan might be right for you, take care to research your choices. Find out about the terms and rates, and read what other borrowers are saying about their experiences with a given lender, before you commit.

As difficult as it can be, bankruptcy might be your best way out of a bad situation, and a high interest short-term loan can also be a helpful tool in certain circumstances. Don’t make any decisions without consulting a qualified expert. Then proceed with caution and know that if you follow the rules, better days are ahead.

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