File for bankruptcy

Bankruptcy is a way of dealing with your financial affairs if you cannot pay your debts. While it is not a criminal offence to get into debt, becoming a bankrupt has serious implications. You can be made bankrupt if you owe £750 or more and fail to pay it within three weeks of receipt of a statutory demand; or if you fail to satisfy a judgement debt.

Under these circumstances a creditor can apply to the court for an order of bankruptcy, or the debtor can apply himself. If the debtor has paid the bill(s) in question, or the court feels he has made a reasonable offer to his creditors, which has been unreasonably refused, then a bankruptcy order may not be made.

What happens once a business is declared bankrupt?

A bankrupt cannot act as a director or be involved in the management of a company; be an MP, counsellor or JP; obtain credit of more than £250 without revealing he is an un-discharged bankrupt; engage directly or indirectly in any business other than in the name he was adjudged bankrupt without disclosing his bankruptcy.

Any money a bankrupt earns belongs to his trustee in bankruptcy, less anything the trustee feels is necessary to maintain or motivate him. The trustee uses all the bankrupt's assets to pay off first, the secured creditors (the bank), then the preferential creditors (PAYE, VAT, National Insurance and wages) and then everyone else.

However, bankruptcy frees the debtor from financial worry and allows him to make a fresh start. And unless the bankrupt makes a habit of this offence the stigma is short-lived. If the debts are less than £20,000 the bankrupt is automatically discharged after two years. In all other cases a bankrupt will be discharged after three years. These conditions only apply to people who have not been bankrupted before in the last 15 years. These will have to wait five years or longer for their discharge.

See also Develop an exit strategy Deal with insolvency