The Ultimate Survival Guide: Bankruptcy for Businesses

Hello, there!
Thinking about when a business might go broke? Wondering if bankruptcy could help? Well, let’s talk then! Bankruptcy is like a ‘reset button’ for struggling businesses in both the US and the UK. It’s like when you’re in big trouble and need a fresh start. But wait! Before diving in, let’s unpack this together.

This guide on bankruptcy for businesses will explore when this process comes into play. From difficult times to the level of trouble, we’ve got you covered! So, sit tight. Let’s explore this financial puzzle and see where it fits for US and UK businesses.

Bankruptcy Meaning

The term “bankruptcy” originates from the Italian phrase “banca rotta,” which translates to “broken bench.”
In medieval Italy, merchants and moneylenders conducted their business on benches in marketplaces. If one of them failed to pay their debts or went out of business, their bench (or ‘banca’ in Italian) was physically broken as a public sign of their financial failure. This practice is where the modern term “bankruptcy” has its roots, symbolizing the collapse of one’s financial standing or business.

Bankruptcy is when a person or a business officially says they can’t repay the money they owe. It’s a legal process where they get help to deal with their debts, sometimes by selling their things to pay off what they owe. Bankruptcy can give them a chance to start over financially, but it also has serious consequences, like affecting their credit score and ability to borrow money in the future.

What Is Bankruptcy?

The definition of bankruptcy differs slightly in the US and UK. To make this easy for you, we provided both. Take a look below:

In the US

Bankruptcy happens when someone or a business can’t pay what they owe. It allows for a new beginning when bills become impossible to manage.

First, the person or business in trouble asks for bankruptcy. Usually, the person who owes money (the debtor) starts this process. Sometimes, the people or companies owed money (creditors) begin it. Everything the person or business owns is checked and valued. Some of these things might be used to repay some of the money owed.

In the UK

Bankruptcy happens when individuals, like self-employed people (sole traders) or those in partnerships, can’t pay what they owe. But for companies, it’s called liquidation or other insolvency proceedings—such as administration, receivership, or company voluntary arrangement (CVA).

Sometimes, “bankruptcy” is used to talk about any financial trouble. It means creditors—the people or organizations the business owes money to—might not get their money back easily.

Types of Bankruptcies

Bankruptcy can take different forms, depending on the situation and who declares bankruptcy. It also changes according to the rules and regulations of different jurisdictions:

US

Although the main aim of bankruptcy is to erase debt, not all bankruptcies are the same. There are six different kinds of bankruptcies in the US:

1. Chapter 7: Selling Assets.
2. Chapter 13: Payback Plan.
3. Chapter 11: Big Business Reorganization.
4. Chapter 12: Farmers and Fishermen.
5. Chapter 15: International Cases.
6. Chapter 9: Cities and Towns.

Seeing this list might have made your mind wander. That’s alright. Chances are, you’ll probably only deal with the two most common types: Chapter 7 and Chapter 13 bankruptcy, especially if you’re an individual. And as for the bankruptcy for business, Chapter 11 could be your best solution.

UK

There is only one type of bankruptcy available in the UK. And this bankruptcy is only for individuals. Various insolvency proceedings—overseen by insolvency practitioners—such as liquidation, administration, receivership, and company voluntary arrangements (CVA) could prove handy for businesses or limited companies with debt.

Example of Bankruptcy for Business and Individual

A Real-life Example Based on a US incident

Lehman Brothers Holdings Inc. is a worldwide financial services company dealing with investment banking, research, trading, investment management, private equity, and private banking. It collapsed on September 15, 2008, with assets valued at $600 billion.

Metaphorical Example for UK Jurisdiction

A bank employee, Benjamin, bought a car on credit when his job was stable. But things changed when the bank laid off many employees, leaving Benjamin without work for a year. He used overdrafts and credit cards to manage, but debts piled up fast. With daily calls from creditors, Benjamin chose bankruptcy. He applied online, sharing his finances and assets with an official receiver from the Insolvency Service.
After an interview about his situation, the receiver took control of Benjamin’s assets, including his car, to sell and repay debts. Benjamin’s name was listed in the Individual Insolvency Register for six years. After a year, his bankruptcy ended, wiping out his debts.

How Does Bankruptcy Work?

Now, let’s talk about an important aspect of bankruptcy: How does bankruptcy function?

Bankruptcy is a complex legal process that offers individuals and businesses a way to deal with overwhelming debt. It can be a difficult decision with severe consequences, so it’s essential to understand how bankruptcy works and its characteristics before considering it. A breakdown of both US and UK bankruptcy is given below:

Function and Characteristics of a US Bankruptcy

Bankruptcy allows individuals or businesses to start over by forgiving debts they can’t pay. Creditors might get some repayment from the assets available for sale.

Simply put, filing for bankruptcy helps the economy by giving people and companies a fresh start with credit. It also lets creditors get back some of what they’re owed.

All bankruptcy cases in the US go through the federal courts. A judge decides if someone can file and if their debts should be forgiven.

A trustee appointed by the Department of Justice usually manages bankruptcy cases. They represent the debtor’s estate. Usually, the debtor and the judge don’t talk unless a creditor objects. When bankruptcy ends, the debtor is free from their debts.

US bankruptcy has some key features that make it unique:

1. Bankruptcy for Businesses and Individuals: In the US, people and companies can file for bankruptcy.
   
   
2. Different types for different needs:
   
   
   • Chapter 7: This wipes out most debts but might require selling some assets.
     
     
   • Chapter 11: Used by businesses to reorganize and keep running while paying off debts.
     
     
   • Chapter 13: Enables people with a steady income to create a repayment strategy for all or a portion of their debts.
     
     
3. Automatic Stay: Once you file for bankruptcy, creditors must immediately stop all debt collection efforts. This means no more calls or letters asking for payments.
   
   
4. Court Involvement: A bankruptcy case goes through the court, and a judge and court trustee oversee the process.
   
   
5. Impact on Credit Score: Filing for bankruptcy can significantly affect your credit score, making it harder to get loans in the future.
   
   
6. Discharge of Debts: At the end of the process, most (but not all) of your debts may be forgiven (“discharged”), giving you a fresh financial start.

Function and Characteristics of a UK Bankruptcy

Now, let’s talk about the bankruptcy in the UK. How does bankruptcy actually work in the UK? In the UK, only individuals can go bankrupt; there’s just one kind of bankruptcy here.

You don’t need a specific amount of debt to file for bankruptcy. If you can’t manage your debts anymore, bankruptcy could be a way to sort out your financial issues. When you apply for bankruptcy, the Insolvency Service handles your application. They assign an official receiver to manage your case and restructure your debts.

If you owe £5,000 or more, your creditors can start bankruptcy proceedings against you without your permission. It’s their way of chasing debts when other attempts fail.

Bankruptcy has good and bad sides, so it’s wise to seek fair advice on insolvency if you’re having money troubles.

Here are the main features of a UK bankruptcy:

1. Bankruptcy lasts for 12 months.
   
   
2. Significant debts are cleared after 12 months.
   
   
3. Certain personal debts, like student loans or child support, remain.
   
   
4. You lose control of your finances, and your bank accounts are closed.
   
   
5. You might need to pay some of your income to creditors for a while.
   
   
6. High-value belongings like your home or car could be taken.
   
   
7. Your business might shut down, affecting employees’ jobs.
   
   
8. Bankruptcy becomes public knowledge.
   
   
9. You’ll lose your job if you work as a lawyer, Member of Parliament, or trustee.
   
   
10. No credit options exist for 12 months; bankruptcy stays on your credit record for six more years.

Bankruptcy Law Country-to-Country

Bankruptcy law varies depending on the country and jurisdiction. Take a look below to learn briefly about and understand the previous statement:

United Kingdom

In the UK, bankruptcy concerns sole proprietors and partnerships. Corporate entities follow distinct legal procedures, like liquidation and administration. Scotland refers to this process as sequestration.

United States

US bankruptcy falls under federal jurisdiction per the US Constitution. Congress has the authority to create consistent laws on bankruptcy nationwide.

Singapore

In Singapore, bankruptcy happens when a person or a business can’t pay debts of at least $15,000. The General Division of the High Court deals with bankruptcy cases. When someone is declared bankrupt, all their belongings go to a trustee chosen by the court. This trustee then handles the bankrupt person’s money matters.

UAE

In the UAE, business bankruptcy is governed by Federal Law by Decree No. 9 of 2016. This law helps distressed companies through out-of-court restructuring, composition procedures, and potential new loans. It doesn’t apply to individuals and covers various company types to enhance business stability and investor confidence in the UAE market.

Australia

In Australia, bankruptcy falls under the Federal Bankruptcy Act of 1966. A creditor can ask the Federal Circuit Court for a sequestration order if someone becomes bankrupt. To seek protection, an individual can file a debtor’s petition with the Official Receiver, requiring a debt of at least $5,000 for a creditor to file a petition.

Canada

In Canada, bankruptcy is termed insolvency and is governed by the Bankruptcy and Insolvency Act. The Superintendent of Bankruptcy oversees fair and orderly bankruptcy administration.

China

China legalized bankruptcy in 1986 and introduced a more comprehensive law in 2007.

Bankruptcy Court

The special courts in the United States, known as bankruptcy courts, deal with personal and business bankruptcy cases. These courts differ from the federal court created in 1781 by the U.S. Constitution. The bankruptcy court system came into being much later in 1978, set up by Congress through the Bankruptcy Reform Act. Since its creation, the U.S. Bankruptcy Code has seen many changes through various amendments.

Take a look below to learn briefly about bankruptcy courts:

• Bankruptcy courts are within the federal court system.
  
  
• In the United States, there are 94 Federal bankruptcy courts. Judges serving on the bankruptcy court bench have 14-year terms.
  
  
• If you can’t pay what you owe, you might end up in bankruptcy court, but you only sometimes need to sell everything you own.
  
  
• Business owners might file for bankruptcy to rearrange their debts without shutting down their company.
  
  
• You can challenge the decisions made by the bankruptcy court if you disagree with them.

For the UK

All bankruptcy proceedings in the United Kingdom are governed by the High Court or the County Court, following the pertinent provisions of the Insolvency Act 1986.

Lawyer for Bankruptcy

A bankruptcy lawyer is an attorney specializing in offering legal advice to a person dealing with bankruptcy, preparing legal paperwork, and representing them in court. To work as a lawyer, they must have a law degree and a license in the state where they practice.

As your guide throughout the bankruptcy process, an attorney can help you with:

• Choosing whether declaring bankruptcy is the best course of action.
  
  
• Choosing the type of bankruptcy that suits your situation.
  
  
• Understanding how the bankruptcy process functions.
  
  
• Completing necessary forms provided by the court.
  
  
• Identifying which debts can be reduced or erased.
  
  
• Determining if you can keep your home, car, or other belongings after bankruptcy.

Overall, a bankruptcy lawyer can provide the right legal direction. Without a bankruptcy lawyer, you may make legal errors that have lasting financial impacts.

And the above-mentioned obligation for a bankruptcy lawyer is for the US.

For the UK

In the UK, you don’t necessarily need a bankruptcy lawyer to file for bankruptcy. It is simple enough to complete the procedure by yourself. However, getting advice from a financial advisor or an insolvency practitioner is a good idea to fully understand the process.

The main role in managing your bankruptcy is played by the Official Receiver, an officer from the Insolvency Service. They take charge of your assets and deal with your creditors, making sure that the process runs smoothly and legally.

Qualifications/Requirements for Bankruptcy

To qualify for bankruptcy, there are specific requirements that vary depending on the country and the type of bankruptcy. Generally, you must demonstrate that you cannot pay your debts as they become due.

Requirements for Bankruptcy in the US

In the US, to qualify for bankruptcy, individuals often need to pass a means test for Chapter 7 or have a regular income for Chapter 13, along with completing credit counseling. Businesses can file under different chapters, each with its own requirements.

Requirements for Bankruptcy in the UK

In the UK, individuals can apply for bankruptcy if they can’t pay their debts, but they must also pay a fee and provide detailed financial information to the Insolvency Service. There are no specific debt thresholds, but the cost and impact of bankruptcy make it a serious consideration.

Applying for Bankruptcy

In the US, applying for bankruptcy involves filing a petition with a federal court, often requiring careful consideration of which chapter of bankruptcy (such as Chapter 7 or Chapter 13) best suits your financial situation.

In the UK, the bankruptcy application process starts with completing an online application and paying a fee, providing detailed information about your finances to the Insolvency Service for assessment.

Take a look below to learn how the application works:

Filing for Bankruptcy

Going bankrupt is often seen as the final choice for folks with lots of debt and no way to pay. But before going that route, think about other options. They’re cheaper than bankruptcy and might not harm your credit as much.

For instance, talk to your creditors. Instead of waiting for bankruptcy and possibly not getting anything, some creditors might agree to take less money over a longer period.

There are some alternatives you should consider before filing for bankruptcy:

For the US

• Forbearance: Forbearance means you can temporarily delay paying back a loan, like a mortgage or student loan. Forbearance lets you put off making payments for a while.
  
  
• Payment Arrangements: Repayment plans mean you might pay less each time but for a longer time.
  
  
• Changing Loan Terms: Loan modification means the lender might agree to alter your loan terms, like reducing the interest rate for the rest of the loan.

For the UK

• Informal arrangement: Informal arrangement means writing to everyone you owe money to and trying to find a middle ground.
  
  
• Individual Voluntary Arrangement (IVA): Individual Voluntary Arrangement, or IVA, is a way approved by law to lower what you owe, stop more interest charges, and decrease how much you pay each month. First, talk to an insolvency practitioner. They’ll check if your plan can work.
  
  
• Administration Order: If a creditor gets a judgment against you, the Enforcement of Judgements Office (EJO) might make an administration order. With this, you pay the EJO regularly to cover what you owe. Your total debt must be under £5,000, and you need enough money coming in to pay weekly or monthly. Find out more about administration orders.
  
  
• Debt Relief Order (DRO): If you can’t pay what you owe, owe less than £30,000, own things worth less than £1,000, and have less than £50 left each month after normal expenses, you might get a Debt Relief Order (DRO).

How to File Bankruptcy Without a Lawyer?

In the US

If you file for bankruptcy on your own, known as ‘pro se,’ you might get help from non-attorney petition preparers. These helpers can only fill out forms with your information. They’re not allowed to give legal advice, explain legal questions, or help you in court. They have to sign any documents they prepare for you, include their details (name, address, and social security number), and give you copies of everything. They can’t sign for you or pay court fees for you.

In the UK

In the UK, you can apply for bankruptcy online through the government’s Insolvency Service website, filling out the necessary forms and providing detailed financial information without the need for a lawyer, but again, being aware of the process and its implications is essential.
The online application cost for bankruptcy in the UK is £680.

What Happens When You File for Bankruptcy?

The consequences of bankruptcy in the US are: your assets may be used to pay off debts, and certain debts like credit cards and medical bills might be wiped out, but this significantly affects your credit score.

The consequences of bankruptcy in the UK are: your assets can be sold to pay debts, and you might face certain restrictions in business and financial management, but it can also clear most of your debts and give you a fresh start.

In both countries, bankruptcy provides relief from debt but comes with long-term financial and legal consequences.

How Many Times Can You File for Bankruptcy?

In the United States

Even though you usually have to wait a bit before you can file for Chapter 7 or Chapter 13 bankruptcy again, there’s no cap on the number of times you can do it. However, filing for bankruptcy multiple times can hurt your credit score for a longer period. A Chapter 7 bankruptcy can remain on your credit report for 10 years from when you filed it, and a Chapter 13 bankruptcy can show up on your report for seven years from when you filed.

In the UK

In the UK, there’s also no specific limit on the number of times you can declare bankruptcy, but each instance is treated individually, and repeated bankruptcies can lead to more severe consequences and scrutiny.

Who Pays for Bankruptcies?

In the United States

The person who files for bankruptcy usually pays the court filing fee, which helps to support the court system during bankruptcy cases. People earning below 150% of federal poverty guidelines can request a fee waiver. Then, the Bankruptcy Court handles all related costs, ensuring the necessary services for a successful case.

As this puts pressure on the courts, fee waivers are only given when it’s clear the person can’t afford the fee even after filing and when debts no longer need repayment. If your filing fee is waived, you might also get waivers for credit counseling and debtor education courses.

If you want a lawyer for your case, you must pay for their services. Remember, you can file bankruptcy without a lawyer if you can’t afford one.

Here is the link for federal poverty guidelines.

In the United Kingdom

In the UK, when someone goes bankrupt, the cost of the bankruptcy process is usually paid by the person who is applying for bankruptcy. This includes fees for filing for bankruptcy and other related costs. Sometimes, if they don’t have enough money to cover these fees, they might have to borrow from friends, family, or other sources.

Also, when their assets are sold to pay off debts, the money from the sale is used to cover the costs of the bankruptcy process, like paying the people who manage the bankruptcy—called trustees, insolvency practitioners, or official receivers. After these costs are paid, any remaining money is used to pay back the creditors—the people or companies that are owed money.

So, in short, the person going bankrupt is responsible for the costs, and if their assets are sold, the money from that sale helps pay for the bankruptcy process.

Bankruptcy for Business and Individual Process

Filing bankruptcy can help a person by discarding debt or making a plan to repay debt. To make the process easily comprehensive, we provided a general overview of both the US and UK bankruptcy processes.

US Bankruptcy Process

The bankruptcy process in the United States involves several steps, designed to help individuals or businesses deal with their debts. Here’s a general overview:

• Assessing Your Situation: First, determine if bankruptcy is the best option. This often involves reviewing your debts, assets, and income.
  
  
• Credit Counseling: Before filing for bankruptcy, you’re required to complete a credit counseling session with an approved agency. This must be done within 180 days before filing.
  
  
• Choosing the Type of Bankruptcy: Decide which type of bankruptcy to file for. The most common types are Chapter 7 (liquidation bankruptcy) and Chapter 13 (reorganization bankruptcy) for individuals, and Chapter 11 for businesses.
  
  
• Filing the Petition: You or your lawyer will file a bankruptcy petition with the court. This includes detailed financial information such as assets, liabilities, income, and expenses.
  
  
• Automatic Stay: Filing the petition triggers an “automatic stay,” which immediately stops most creditors from seeking to collect debts from you.
  
  
• Meeting of Creditors: After filing, a meeting of creditors, also known as the 341 meeting, is scheduled. Here, creditors can ask questions about your finances and the bankruptcy documents.
  
  
• Bankruptcy Trustee: In Chapter 7, a trustee is appointed to oversee your case, including selling non-exempt assets to pay creditors. The trustee manages your repayment plan in Chapter 13.
  
  
• Repayment Plan (Chapter 13): If you file under Chapter 13, you’ll propose a repayment plan to make installments to creditors over three to five years.
  
  
• Discharge of Debts: At the end of the bankruptcy process, most of your debts will be discharged, meaning you are no longer legally required to pay them.
  
  
• Post-Bankruptcy Counseling: After filing for bankruptcy, you must complete a debtor education course before debts can be discharged.
  
  
• The Final Decree: Once all processes are completed and approved by the court, the bankruptcy is concluded with a final decree.

Please bear in mind that the abovementioned is merely a synopsis. The actual process can be complex and varies based on individual circumstances and the type of bankruptcy filed. It’s often advisable to consult with a bankruptcy attorney to navigate this process effectively.

UK Bankruptcy Process

The UK bankruptcy process is only for individuals or business entities like sole traders and partnerships. The process of UK bankruptcy is briefly discussed here:

• Assessment of Eligibility: First, check if you’re eligible for bankruptcy. This usually means being unable to pay your debts.
  
  
• Application Online: You apply for bankruptcy online. This involves filling out a form and providing detailed financial information.
  
  
• Fee Payment: There’s a fee to pay for declaring bankruptcy. This needs to be paid as part of the application process. The filing fee for bankruptcy is £680. Obtaining a Debt Relief Order (DRO) may be possible if you have no assets and owe less than £30,000. DROs are priced at £90 each.
  
  
• Review by Adjudicator: After you apply, an adjudicator from the Insolvency Service reviews your application to decide if you should be made bankrupt.
  
  
• Bankruptcy Order: If the adjudicator agrees, they’ll issue a bankruptcy order. This is the formal step that makes you bankrupt.
  
  
• Appointment of Trustee: Once bankrupt, a trustee (usually an official receiver) is appointed to manage your bankruptcy.
  
  
• Asset and Finance Review: The trustee reviews your assets and finances. They may sell certain assets to pay your debts.
  
  
• Creditor Communication: The trustee will deal with your creditors, so you don’t have to communicate with them.
  
  
• Discharge from Bankruptcy: Usually, after 12 months, you’re discharged from bankruptcy, meaning you’re no longer bankrupt.
  
  
• Credit File Impact: Bankruptcy affects your credit file for six years, making it harder to borrow money.

This bankruptcy process is designed to give you a fresh financial start, but it’s important to understand the implications and seek advice before proceeding.

Who Oversees or Deals with the Bankruptcy Process?

The bankruptcy process is typically overseen by a specialized court, an insolvency practitioner, or a bankruptcy lawyer, depending on the legal system of the specific country.

In the United States

Every judicial district has its own bankruptcy court in the US. States have one or more districts, totaling 90 across the nation. These courts typically manage their own clerk’s offices.

The United States bankruptcy judge, a judicial officer of the United States District Court, holds the authority to decide matters related to federal bankruptcy cases. This includes decisions on who can file for bankruptcy and whether a debtor qualifies to clear their debts. However, most administrative work in bankruptcy cases happens outside the courthouse. A bankruptcy trustee oversees this administrative process in Chapters 7, 12, or 13, and sometimes in Chapter 11 cases.

In the United Kingdom

You can keep money for daily living expenses and often your pension when you face bankruptcy in the UK. Any extra earnings beyond your basic needs should go towards paying off debt. If uncertain, you can verify what’s considered essential living expenses. An insolvency practitioner will act as an ‘official receiver’ and manage the remaining funds once you’re bankrupt.

Bankruptcy Discharge

When you get a bankruptcy discharge, it means you’re no longer responsible for paying certain types of debts. It’s like a permanent order that stops creditors from making you pay these debts. This means they can’t take you to court or contact you about these debts through calls, letters, or in person.

US Bankruptcy Discharge

The time of bankruptcy discharge depends on the bankruptcy type. In Chapter 7, it’s usually about four months after filing. For Chapters 11, 12, and 13, it’s after finishing payments—about four years for Chapters 12 and 13. If someone misses a financial course in Chapter 7 or 13, the court might not allow their debts to be cleared. There are exceptions if the right educational programs aren’t available or if the person is disabled, incapacitated, or in a combat zone on active military duty.

UK Bankruptcy Discharge

Usually, bankruptcy ends after a year in the UK, on the first anniversary of when the bankruptcy started. Sometimes, it might end later, which is known as ‘delayed discharge.’

How Long After Bankruptcy Can I Get A Mortgage?

In the United States

The duration of obtaining a mortgage in the US after bankruptcy varies based on the type of bankruptcy filed and the lender’s criteria. Here’s a general timeframe:

• Chapter 7 Bankruptcy (Liquidation): Typically, you may qualify for a conventional mortgage after 2-4 years from the discharge date. FHA and VA loans might have shorter waiting periods (around 2 years) post-discharge.
  
  
• Chapter 13 Bankruptcy (Repayment Plan): For conventional loans, you might qualify 4 years after receiving the discharge or 2 years after making consistent payments under the repayment plan. FHA loans may require 1-2 years of repayment plan completion, with approval during the plan or after discharge.
  
  
• Lender Requirements: Individual lenders have varying criteria. Some might consider borrowers earlier under specific circumstances or with larger down payments or higher interest rates.
  
  
• Credit Rebuilding: It’s a must to rebuild credit post-bankruptcy by paying bills on time, managing credit responsibly, and keeping credit accounts open. A good credit score and stable financial history can enhance mortgage approval chances.

Always consult with lenders or mortgage specialists who can provide tailored advice based on your financial situation and the type of bankruptcy you filed. They can guide you through the process and offer insights specific to your circumstances.

In the United Kingdom

In the UK, it all comes down to the lenders you talk to. Some might discuss mortgages right after you finish bankruptcy, but most won’t think about it until a year later. Others might need even more time to pass.

The lenders who will think about giving you a mortgage will probably want three years to pass after you finish bankruptcy. Usually, the bankruptcy process takes a year, and it stays on your credit file for six years from when it started.

How Long Does Bankruptcy Stay on My Credit Report?

For the US

Chapter 7 bankruptcy discharge orders can typically remain on credit reports for ten years following the initial filing date. After ten years have passed, the bankruptcy should automatically be discharged from your credit reports.

A Chapter 13 bankruptcy may remain on a credit report for a maximum of seven years after the bankruptcy petition date. The bankruptcy should automatically come off credit reports after seven years.

For the UK

After 12 months of starting bankruptcy, you’re usually no longer bankrupt in the UK. But for six years, it shows up on your credit reports. Lenders, mortgage providers, utility companies, and others who check your file will see it during this time. This impacts how likely you are to borrow money. If you want credit, the lenders might offer it but at a higher interest rate.

Which One Goes for a Company, Liquidation or Bankruptcy?

You might have heard about “company bankruptcy” in the US, but bankruptcy is for individuals with debts in the UK. A UK-limited company doesn’t “go bankrupt” like the US; instead, it goes through an insolvency proceeding called liquidation.

One common type is creditors’ voluntary liquidation (CVL), which directors or shareholders start. During this process, the company stops operating, settles its affairs, and gets removed from the Companies House register when it’s done.

What Are the Advantages of Filing for Bankruptcy?

Bankruptcy has some unavoidable advantages that can provide relief and a fresh financial start for individuals struggling with overwhelming debt.

Advantages of Bankruptcy in the US

The advantages of bankruptcies in the US are given below:

Bankruptcy Frees You From Creditors

It helps by stopping them from asking for money while your bankruptcy case is happening. It also gives you a temporary shield from losing your home, getting kicked out, or losing your car. Later, if a debt is wiped out by bankruptcy, the people you owe can’t try to collect that money.

Protects Future Earnings

The money you make after filing for bankruptcy doesn’t belong to the bankruptcy process. This means that your future pay can’t be used to pay off debts that were wiped out. But if there are debts left, like money you owe for child support or in a payment plan, they might still take some of your future earnings in Chapter 13.

Your Mood May Improve

Handling people who demand money can be tiring. Money problems can really affect your health and family. Bankruptcy can give you a break and a chance to start fresh.

You Get To Keep Some Things You Own

With Chapter 13 bankruptcy, you could delay or stop your home from being taken away or your car from being repossessed. You might even get to keep your car if it fits the rules that protect certain things. For instance, a rule might let you keep a car if its value is below a specific amount, like $4,450, as per federal rules. If your car is worth less, like $4,000, you might be allowed to keep it because it meets the protection rules.

Court-Appointed Representative

Once you ask to go bankrupt, the court will appoint a representative for you. This person called a trustee, will take care of your case until it’s finished. They’ll work for you during the whole thing, talking to the people you owe money to, and if it’s Chapter 13 bankruptcy, they’ll get and manage the money you need to pay.

Advantages of Bankruptcy in the UK

The advantages of bankruptcies in the UK are given below:

A New Beginning

Bankruptcy offers a chance to start fresh with your money. It clears your debts and gives you a clean start.

Shield from Creditors

Once you file for bankruptcy, creditors can’t bother you or take any action against you. They’re legally stopped from doing anything to you.

Easier Monthly Payments

Sometimes, your bills could get smaller after bankruptcy. This makes it easier to manage your money each month.

Flexible Repayment Plans

You might get more options for paying back what you owe. This helps if money’s tight. You don’t need to pay for everything at once.

Peace of Mind

Bankruptcy brings peace by sorting out your debt and getting you back on track with money. It’s a way to feel better about your finances.

Professional Management

An insolvency practitioner is in charge of overseeing the procedure to make sure it is fair and professional.

What Is the Downside of Filing for Bankruptcy?

Bankruptcy, while offering relief from crushing debt, comes with several disadvantages that you should be aware of before making a decision.

Disadvantages of Bankruptcies in the US

The disadvantages of bankruptcies in the US are given below:

Destruction of Credit

Your credit score shows how likely you are to pay back money, so bankruptcy can seriously harm it. A bankruptcy stays on your credit report for up to 10 years, but you can start fixing your credit right after. Begin by getting a secured credit card. If your credit isn’t great when you file for bankruptcy, the hit to your credit score might not be huge. If your credit is still okay, there might be other options for bankruptcy.

Expensive

The bankruptcy filing fee scale spans from $313 for Chapter 13 to $338 for Chapter 7. Lawyers charge differently but usually start at $1,300 for Chapter 7 and $3,000 for Chapter 13.

Stigma

Bankruptcy might make some people feel ashamed or embarrassed because of what others think. But it’s important to know that money problems can happen to anyone. Getting help through bankruptcy is a valid and responsible way to deal with financial troubles.

Giving up Luxury Items

Bankruptcy protects some things, like your home and clothes. But with Chapter 7, things that don’t get protected must be sold to pay off your debts. In Chapter 13, you keep your stuff, but the value of extra, fancy things is used to work out a plan with your creditors.

Getting Loans Will Be Tough

Having a bankruptcy on your credit report will make lenders hesitant to lend you money later on. You might not get a loan until the judge clears your debt. If you filed Chapter 7, you must wait two to four years after your debt is cleared before trying to get a mortgage.

Disadvantages of Bankruptcies in the UK

The disadvantages of bankruptcies in the UK are as follows:

Public Information

When you declare bankruptcy in the UK, it becomes public. This means that anyone, like your creditors, employers, or landlords, can find out about it. This might affect how people see you and make it harder to get credit later on.

Impact on Credit Rating

Declaring bankruptcy can harm your credit score in the UK. It sticks on your credit report for six years, making it tough to get credit in the future. Some lenders might think you’re not good with money because of bankruptcy.

Directors of Companies

If you’re a company director and go bankrupt in the UK, there could be more rules for you. You might not be allowed to be a director or manage a company for some time. This can really affect your business.

Bank Accounts and Cards

Going bankrupt in the UK might mean your bank accounts and credit cards get canceled. This can make it hard to handle everyday money and might mean you need a simple bank account.

Trouble Getting Loans

In the UK, bankruptcy can make it tough to get loans later. Lenders might think you’re risky and say no to lending you money. Even if you get a loan, you might face high interest rates.

Bankruptcy and Insolvency

Bankruptcy and insolvency are related to the inability to pay debts, but they happen differently.

• Bankruptcy: Bankruptcy is a legal process that happens in court. It’s one way to deal with insolvency. When someone is bankrupt, the court steps in to handle their debts. This might mean selling their things to pay off what they owe. Bankruptcy is a formal step that happens when insolvency gets terrible, and there needs to be a legal way to fix it.
  
  
• Insolvency: Insolvency happens when a person or company just doesn’t have enough money to pay their debts when they’re due. It’s like having a wallet that’s always empty when it’s time to pay bills. Insolvency can lead to bankruptcy, but it’s the first step and doesn’t always end up in court. Sometimes, people or companies can find other ways to handle their debts without going into bankruptcy.

In the UK, if you’re running a business alone (as a sole trader) or with someone else (in partnership), you can go bankrupt. But if it’s a limited company, it can’t be declared bankrupt. Instead, limited companies go through a process called liquidation, which leads to the company getting ‘wound up’.

UK Bankruptcy Vs. US Bankruptcy

Understanding the key differences between bankruptcy in the UK and the US can be really helpful, especially if you’re trying to figure out if bankruptcy is the right choice for you in your country.

The differences between UK and US bankruptcy are briefly given below:

Who Can Declare Bankruptcy?

UK: Only individuals can declare bankruptcy. Companies can’t declare bankruptcy but follow different rules if they’re in financial trouble.

US: Both individuals and businesses, including corporations, can declare bankruptcy.

Types of Bankruptcy

UK: There’s just one type of bankruptcy, which applies only to individuals.

US: There are different types, mainly Chapter 7 and Chapter 13 for individuals and Chapter 11 for corporations and businesses.

Main Goal

Both UK and US: The main aim is to help people or entities that are struggling financially. This includes stopping creditors from demanding payments, rearranging existing debts, and sometimes erasing large debts.

Misunderstandings

In the UK, a common misconception is that companies can declare bankruptcy, but actually, they can’t. They need to look for other ways—different insolvency proceedings are available here: liquidation, receivership, company voluntary arrangement, and administration—to deal with financial issues.

In summary, the key difference lies in who can declare bankruptcy (only individuals in the UK vs. both individuals and companies in the US) and the types of bankruptcy available.

FAQs

Q1: What Does It Mean to File for Bankruptcy?

Answer: Filing for bankruptcy means you’re legally declaring that you can’t pay back your debts. It’s a formal process where you go to court and follow specific rules to either erase your debts or create a plan to pay them over time. This process provides some relief from debt but can affect your credit score and financial status for several years. Filing for bankruptcy can offer a fresh start, but it also comes with significant consequences, so it’s usually considered a last resort.

Q2: Who Files for Bankruptcy the Most?

Answer: The most common filers for bankruptcy are individuals who find themselves unable to manage their debt, often due to unforeseen circumstances such as medical emergencies, unemployment, or other financial hardships.

Additionally, small business owners facing unsustainable debt levels frequently file for bankruptcy. Both groups often see bankruptcy as a last resort to reorganize their finances, seek relief from overwhelming debt, and get a fresh start.

Q3: How Do I Qualify for Bankruptcy?

Answer: You must meet certain criteria which are specified and can vary based on country and jurisdiction to be qualified for bankruptcy.

Q4: What Are Bankruptcy Filings?

Answer: In the US, bankruptcy filings are legal processes where individuals or businesses ask a federal court to recognize their inability to pay debts, involving paperwork detailing their financial situation. In the UK, individuals file for bankruptcy online through the Insolvency Service, providing financial details, and a trustee is appointed to manage the debt repayment process, typically lasting a year.

Bottom Line

That’s it. We have briefly explored every aspect of bankruptcy for businesses. If you still have any queries, feel free to contact our experts or check out the individual blog posts on US and UK bankruptcies.
Have a great day!