Personal bankruptcy : is it the end of the world ?

As the much reported cost of living crisis appears to continue unabated, a number of people are beginning to contemplate the “unthinkable” and wonder if bankruptcy is the only way forward to deal with a debt burden.?Seeking independent financial advice should always form part of anyone’s plan of action. For example, it may be possible to negotiate with creditors because, whilst a creditor might not like receiving repayment over a longer period of time than originally contracted, collecting something rather than nothing is always more palatable.

Currently, the Meston Reid & Co insolvency team are ?encountering situations where a finance company will try to avoid repossessing a vehicle if a revised payment programme can be established, and mortgage providers are displaying a sense of understanding because they do not want to repossess a house unless absolutely necessary.?

However, there are some for whom it is simply impractical to offer payment proposals to their creditors.?In a situation where every credit card is at its limit and the interest cannot be serviced,?loans are unpaid and the bank overdraft is at its limit, bankruptcy may be the only option if there is no possibility of increasing income and/or no assets to sell.?

For many, there is a stigma associated with the word “bankruptcy” and can often result in an individual ignoring creditors. Last month’s article referred to personal debt challenges which resulted in questions surrounding the subject of bankruptcy.?The most popular ones are :

1.??????Will I lose my house??Much will depend upon whether or not there is any net equity in the house i.e. it is worth more than the secured borrowings, and whether you can continue to service the mortgage.?If there is net equity, your trustee in bankruptcy will seek to recover such value for the benefit of the general body of creditors.?This may include dealing with the spouse and anyone else who has a title interest. In general terms, should the spouse or any other person be able to provide the cash that represents your net equity interest, there is no reason for the trustee to sell the house. Equally, if there is negative equity, the trustee is not interested because there is no reversion for the general body of creditors and indeed, may elect to abandon interest in the house if certain steps are followed.?Of course, if you default on the mortgage payments, the mortgage company can always exercise the option of repossessing the house and selling it on the open market.?

2.??????Will all of my debts be written off??Virtually everything is frozen as at date of bankruptcy and it is up to the trustee to try and realise whatever assets may exist in order to pay a dividend. If the trustee raises no cash from the sequestration, there is no dividend and the debts are written off. Some debts such as student loans, certain DSS liabilities, together with fines are not written-off and therefore need to be taken into account when considering the benefits of bankruptcy relative to your specific circumstances.?

3.??????How long will bankruptcy last??The standard period in Scotland is one year.?The trustee is required to review your conduct during the first nine months or so of the bankruptcy process together with the reasons why bankruptcy occurred.?If you do not cooperate with the trustee and, for example, the bankruptcy was caused by a gambling addiction which has not been addressed, your trustee may ask the State to continue your bankruptcy for a longer period.?

4.??????Do I have to pay anything towards this process??The State requires that you pay a contribution over a four-year period based upon your ability to pay.?A standard document is used in Scotland which considers all sources of income and expenditure in order to calculate a weekly/monthly amount.?Once this has been determined, a Debtor Contribution Order is established.?This will be reviewed on a six-monthly basis in order to allow for changes in circumstances, with the object being to pay what you can afford over a four-year period.?

5.??????Will I automatically lose my job if I am bankrupt??Invariably no.?Very few jobs limit employment to those who are not bankrupt but, for example, anyone holding a professional qualification may find that their ability to operate is either suspended or monitored until the bankruptcy process has been concluded. ?

There is no doubt that the pressure of debt causes anxiety, relationship difficulty, and behavioural changes.?Thousands of people are declared bankrupt in Scotland every year and survive to tell the tale. This shows that the process is not the end of the world, but merely a method of dealing with debt when it becomes wholly unmanageable.?The level of frustration and embarrassment should not be understated, but nobody should feel that they cannot ask for help. Don’t suffer in silence.

This article is written by Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, Aberdeen. The views expressed in this article are his rather than those of the firm.