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09 Oct

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General news

Harder to become bankrupt

Bankruptcy Can Happen to Anyone…

In the last few months you could not escape the national newspaper coverage of the repossession of a luxury flat worth a cool £5.25 million. The one bedroom apartment in London’s One Hyde Park, Knightsbridge, sits opposite Harvey Nichols and Burberry stores and is not usually the type that is offered up by receivers. It has access to a private spa, squash court and a mini-cinema and the owner gets their own 24-hour concierge provided by the Mandarin Oriental hotel next door. Not the usual repossession indeed!

In fact the apartment belongs to Irish Property Developer Mr Ray Grehan, who was pursued for £250 million debts in the wake of the 2008 banking crisis. Mr Grehan, who also owned homes in New York and Ireland, sold the 988 sq ft One Hyde Park apartment for £3.675 million in 2011 but that sale was overturned by the High Court in London in July and now most of the proceeds of the sale after the Barclays mortgage is paid off will go to Mr Grehan’s creditors.

But aside from these sensationalist headlines, going the bankruptcy route is a last resort for people whose finances falter. How do you know to tell the fact from the fiction when taking the plunge? David Kirk of Kirks Insolvency helps debunk a few of those bankruptcy myths that could you into hot water.

Prior to before 1986 when someone was made bankrupt the restrictions on them could last for years with no fixed end in sight. Following the Insolvency Act in 1986 that was shortened to three years and then in 2004 it was shortened again to just a year. We were copying what they did in the USA and it was meant to encourage enterprise and risk taking. That never quite made sense to me as you could just set up a limited company if you were worried about risk.

The 2004 changes also tried to remove some of the stigma surrounding bankruptcy but this appears to have changed naturally because a large portion of the population has have been bankrupt in this last recession.  One of the nicer changes is that the Bankruptcy Order is not usually advertised in the bankrupt’s local paper. I recall that often being the greatest fear before 2004; that the neighbours would find out!

Bankruptcy is actually now a very useful tool in helping to take the pressure of someone whether they are in business or have just built up credit card debt and loans whilst employed. Usually the only problem they face is where they own their own home or jointly own it with a spouse.

It’s hard to advise anyone on the options of bankruptcy or an Individual Voluntary Arrangement (“IVA) versus keeping going without looking at the advantages and disadvantages – so here they are.

The Upsides to Bankruptcy (yes really)

The main one is it clears all unsecured debts such as credit card balances, council tax, bank loans, bank overdrafts, money due on business rates, Vat, Paye, Income Tax, National Insurance and trade suppliers. The list goes on and only secured debts, spousal maintenance, student loans and court fines are not wiped clean.

A lot of people feel significant relief from all the stress they were feeling due to constant pressure from creditors and the worry of a bailiff turning up on their doorstep. I am often told they feel a weight has been lifted and they can move on with their lives.

There is a myth that you get visited at home and items such your TV and possessions get taken away but that is not the case. Bankrupts rarely get visited at home and only have to declare give up high very high value items for example a high value painting.

The Down Sides of Bankruptcy

If you own your own home or a share in it then it is at risk of being sold to pay back your debts if you have equity in the property. If you have a lot of equity then you would need to consider an alternative than bankruptcy such as possibly an IVA. However there is a very useful defence clause to losing your house if you have raised capital on the house to fund their business. This would mean the equity is not necessarily equal.

It will damage your credit rating for at least six years and you cannot be a director of a limited company. It may also affect your employment if you are professionally qualified or a Policeman.

If you are earning good money you may be obliged to make payments for up to three years to your creditors from surplus income but that is only above what you and your family reasonably need to live on.

If you know anyone who may need advice on bankruptcy or the alternatives then ask them to contact David Kirk or Kirk’s Insolvency for a free initial meeting on 01392 474 303

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