As with any financial decision, there are pros and cons to filing for bankruptcy. In order to make an informed decision, it’s important that you’re aware of all the different ways this decision can benefit and impact you. We’ve listed the pros and cons below for you to explore. 

The Advantages of Filing for Bankruptcy

1. Debt Discharge and Fresh Start

One of the most significant advantages of filing for bankruptcy is the opportunity to discharge debts and start fresh. Once a bankruptcy order is granted, unsecured debts such as credit card debts or personal loans  are typically discharged, meaning they are no longer legally enforceable. This provides relief to the debtor, allowing them to break free from the burden of unmanageable debts.

1. Protection from Creditors

Filing for bankruptcy invokes an automatic stay, which prevents creditors from taking any further legal action or pursuing debt collection efforts against the debtor. This protection offers a respite for individuals or businesses facing mounting pressure from creditors, preventing repossessions, wage garnishments, and other creditor actions.

1. Debt Repayment Plan

Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) are alternatives to bankruptcy in the UK. However, bankruptcy has an advantage in terms of a time-bound debt repayment plan. In most cases, bankruptcy lasts for one year, after which the debtor is discharged from their debts. IVAs, on the other hand, can extend for several years.

1. Assets Protection (Subject to Limitations)

Contrary to popular belief, bankruptcy does not necessarily mean losing all assets. The Insolvency Act 1986 and subsequent amendments offer exemptions for certain assets, protecting them from being sold to repay creditors. For instance, basic household items, tools necessary for employment, and a reasonable amount of personal belongings are usually safeguarded.

1. Psychological Relief

Financial struggles and overwhelming debts can have a severe impact on an individual’s mental well-being. Filing for bankruptcy can provide psychological relief, reducing stress and anxiety associated with financial uncertainty. It offers a chance to rebuild your life without the constant weight of unmanageable debts.

The Disadvantages of Bankruptcy 

1. Credit Score and Future Financial Options

Bankruptcy has a detrimental impact on an individual’s credit score. The bankruptcy record stays on the credit report for six years in the UK, making it challenging to obtain credit or loans during that period. Even after the bankruptcy is discharged, it can still affect creditworthiness for some time, limiting access to financial options.

1. Public Record

Bankruptcy proceedings are public records, meaning anyone can access the information. This lack of privacy can be uncomfortable for some individuals, as their financial troubles become a matter of public knowledge.

1. Employment and Professional Consequences

Certain professions and job roles have strict regulations concerning bankruptcy. For instance, individuals working in the financial sector or those holding positions of financial responsibility may face termination or difficulties in finding future employment after declaring bankruptcy.

1. Impact on Property and Assets

Though some assets may be protected, others could be at risk of being sold to repay creditors. Secured debts, such as mortgages and car loans, may still need to be repaid, and failure to do so can result in the loss of the associated assets.

1. Restrictions on Financial Activities

Bankruptcy may impose restrictions on certain financial activities for individuals and directors of insolvent companies. For example, individuals declared bankrupt cannot act as company directors or take credit of £500 or more without disclosing their bankruptcy status. These restrictions can be a hindrance for entrepreneurs and professionals.