How to avoid bankruptcy

If you are in financial difficulties and are unable to pay your debts, you are at risk of becoming bankrupt. To become bankrupt, a petition for bankruptcy must be made by either:

  • The debtor themselves
  • A creditor
  • A group of creditors

However, it is important to try to avoid bankruptcy if at all possible.

When can someone petition for your bankruptcy?

If a creditor wishes to petition for your bankruptcy, you must owe that creditor £750 or more. If you do not owe the creditor £750 or more, they can join with another creditor, or group of other creditors, so that the total amount owed is £750 or more.

Avoiding bankruptcy

If the debtor wishes to avoid bankruptcy, one way of doing so is to enter into an Individual Voluntary Arrangement (IVA) with creditors. This can only happen in certain circumstances and may require the approval of the creditors.

In order to enter into an IVA, an insolvency practitioner must:

  • Draw up a proposal
  • Present it to the court
  • Inform the court whether it is worth calling a meeting of creditors and, if so, a 75% majority must agree to the proposal

The IVA will be overseen by the insolvency practitioner who prepared the proposals and if the debtor fails to comply with the arrangement, then it will become possible for the insolvency practitioner, or any creditor, to petition for bankruptcy.

Benefits of an IVA

Entering into an IVA has benefits for both the creditors and the debtor. The debtor:

  • Will not be subject to the stigma of bankruptcy, or the accompanying bad publicity
  • Will avoid the disabilities and disqualifications that come with being declared bankrupt

The creditors, on the other hand:

  • Will be more likely to recover a higher percentage of the debt owed to them
  • Will recover that debt much more quickly than if bankruptcy proceedings are commenced

An IVA will only be possible if the debtor has the means to make a reasonable offer to their creditors, and will not be suitable in all cases. The alternatives to bankruptcy can be explained to you by an insolvency solicitor.

For many debtors it is important to avoid bankruptcy because of the constraints on day-to-day life that bankruptcy imposes, including damage to your credit rating. Seeking legal advice is a preventative measure which can work out financially beneficial for you in the long run.

For more guidance see our page on IVAs.

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