Bankruptcy: A Potential Consequence of Debt
Bankruptcy and Loans
Why is there a page on bankruptcy at a website that provides information on loans?
For the vast majority of people who borrow money, bankruptcy will be irrelevant: you borrow money, and you pay it back, whether that is by monthly payment or, in the case or illness or accident, by claiming on an insurance policy.
However, if you accumulate bad debt, and/or manage your debt badly, then bankruptcy is one of the potential consequences of failing to keep up the repayments on your loans.
What is Bankruptcy?
Bankruptcy is used in everyday language to identify someone as being unable to meet their debts or liabilities. When it is used in everyday language, it sometimes just reflects the poor financial position of the individual.
However, the word "bankrupt" is also used as a legal term to formally identify a person as bankrupt, and it then has some important implications:
- You lose control of all your assets
- An administrator investigates your financial affairs, and can sell your assets in order to pay off your creditors (the people you owe money to)
- Creditors not only gain rights to your assets, but also gain some control over your behaviour. For example, you may not be able to get any other credit without their permission.
- You are prohibited from a number of activities/jobs, such as acting as a director in a business, or becoming a member of parliament
- Your credit status is badly damaged, making it very difficult to borrow in the future.
Bankruptcy isn't all bad: it can provide a way of getting you out of a really bad situation and starting again. However, that "new start" will not be a completely fresh start: there will be restrictions on what you can and cannot do.
Alternatives to Bankruptcy
There are two main alternatives to bankruptcy.
The first is to avoid getting into a bankrupt position in the first place, by managing your debts, having insurances, etc.. See our page on debt for more recommendations.
The second is to find other ways of paying the debt back. One option is an Individual Voluntary Arrangement, a formal agreement where you pay back part of the debt, and the rest of the debt is written off.
In The Loans Guidebook, we do not provide any further information on bankruptcy. However, Bankruptcy is a potential consequence of taking on too much debt and failing to manage your money properly.
It is therefore essential that you ensure you will be able to afford to pay back any money that you borrow, and we recommend you observe the practices outlined on our page on managing debt.