Top Ten Tips: Routes into bankruptcy

WITH PERSONAL insolvency levels in Scotland soaring and debt problems spread across different sections of society, the stigma of going bankrupt has eased. Iain Fraser, of insolvency trade body R3, offer his tips for those struggling with their debts on going down the bankruptcy route.

1. Take it seriously

Becoming bankrupt has become easier over the last few years but it is not something to be undertaken lightly. It has serious implications not only in the immediate period of the bankruptcy, but also for several years afterwards, with a considerable impact on credit status and ability to borrow.

2. Last resort

The first thing to consider is whether you are at the stage where bankruptcy is a realistic option. Ask yourself whether you are unable to meet the minimum interest payments of your debts. Do you find your debt getting larger each month despite your outlay increasing? Have you reached the point where you are borrowing more and more from lenders who charge excessively large interest rates? If the answer to all or some of these questions is yes then you need to examine your finances further.

3. Other options

Can you release equity from your home, realise any assets you may have, or borrow from family and friends? These may be unpalatable choices for most people but they are preferable to bankruptcy.

4. Suitability

If you find that your debts are increasing and you have no other means of reducing your debt then bankruptcy may be the best option. It is important to get all of your finances assessed at this stage so that an independent judgement can be produced on whether you are a suitable case for bankruptcy and, if so, which of the four main methods is most appropriate for your circumstances.

5. Low income bankruptcy

Low income low asset (LILA) is a relatively new form of bankruptcy in Scotland, having been introduced in April 2008. This is the route for individuals with an income of less than 237.20 per week, no single asset worth more than 1,000 and assets in total not exceeding 10,000. More than 6,000 people used this method over the last year in Scotland. It is applied for through the Accountant in Bankruptcy. Discharge is after three years.

6. Formal bankruptcy

Sequestration, the Scottish legal term for personal bankruptcy, is where you are formally declared bankrupt and your assets and property are transferred to a trustee for the benefit of your creditors. The trustee has a duty to sell the assets and property and may seek a voluntary contribution from your income toward your debt. This process is usually undertaken by your creditors and limits the control you have over your bankruptcy. You can also "self sequestrate" if you owe more than 1,500 and a creditor has taken action against you. This prevents creditors from pursuing you further, but you may lose all your assets. Discharge is after one year but you may have to make contributions for up to three years.

7. New route

The Certificate for Sequestration was introduced last November for those who did not meet the LILA criteria, but whose assets and income were less than those for a protected trust deed (PTD, see below). Discharge is after one year but you may have to make contributions for up to three years.

8. Middle income debtors

Protected Trust Deeds (PTDs) tend to be taken out by more affluent debtors who have assets and an income. An insolvency practitioner acts as a trustee for the individual and liaises with their creditors to work out a realistic level of debt which can be repaid through a payment plan. The trustee remains in place until the end of the three-year repayment period.

9. Long-term impact

While the actual bankruptcy period may last between one and three years, the impact on your ability to acquire credit could last far longer. Therefore building up your credit rating is essential in the post-bankruptcy period. This can be done by ensuring all debts are paid on time, not building up any further debts and establishing a record as a credible borrower.

10. No picnic

The bankruptcy process is difficult, it can be prolonged, and it has an impact on your life for a considerable period. It should not be undertaken lightly but can be helpful in some circumstances. The important thing is to ensure that you select the route most appropriate for your circumstances and will assist in both the short and long term.