Problems and Disasters

If You Are Going Bankrupt

" Bankruptcy will effectively prevent individual creditors taking action against you ..."

The aim of most creditors (i.e. the people you owe money to) is not to make you bankrupt, but to make sure they get paid money they are owed. The whole purpose of bankruptcy is to convert your assets into a lump sum that can be used to pay off your creditors.

Bankruptcy will effectively prevent individual creditors taking action against you.There is a moratorium where the creditors agree to accept payment of all their outstanding debts from the assets that the bankruptcy court official takes off you. All your creditors have to make a claim through the official of the bankruptcy court official or write off their debts.

What is Bankruptcy?
Bankruptcy is a process, laid down by law, which deals with debts a person cannot pay. It is a term used for the formal procedure for individuals who are declared by the court as insolvent (i.e. they do not have sufficient funds to pay their debts).

Bankruptcy only applies to people, either as individuals not in business, or individuals in business as sole traders or partnerships. Bankruptcy does not apply to companies, as companies are a legal entity (or a legal person) in the eyes of the law, so when they cannot pay their debts, they go into a process known as liquidation.

A person can become bankrupt even if they are in business as a sole trader, or in a partnership, or some other structure other than a company, because the law does not look on these structures as separate entities in the eyes of the law. Therefore, the liability for paying those debts remains with the individual who owns the business.

Many individuals in these types of business structures also give personal guarantees for the debts of the business, or even for the debts of the company they operate, and in that case they are personally liable if those debts are not met by that particular business.

What Does Bankruptcy Mean For You?
If you become bankrupt a court official will investigate your financial affairs to see if anything can be done to recover funds for those people to whom you owe money. These people are your creditors. The bankruptcy process will, in effect, wipe all debts owing by you up to that particular time and the courts may or may not ask you to contribute to those debts from future earnings.

During the bankruptcy you are allowed to carry on having a bank account because you need to earn income in order to live. You will also be liable for any debts you incur from the date of bankruptcy, as well as any other debts that are not wiped clean, or covered from the bankruptcy such as child support, court fines or other reparation.

There are many restrictions placed on a bankrupt, so bankruptcy should only be looked at as a last resort. It is a sound strategy to look at all options before choosing bankruptcy to get out of your debt situation.