Effects of bankruptcy

Contributed by Ian Macdonald and current to 1 September 2005

UNSECURED DEBTS

Any action which a creditor is taking against the person or property of a debtor for an unsecured debt is stopped. Instead, the creditor gains a right to make a claim in the bankrupt’s estate.

SECURED DEBTS

A secured debt is one where the creditor has a mortgage, charge or lien over property to ensure payment of the debt. Common examples are a house mortgaged to the creditor to ensure payment of the debt, or a car with a mortgage over it to ensure the car buyer keeps up the payments. If the borrower does not keep up with the payments, the lender can use the mortgage to take the house back and sell it, or repossess the car and sell it.

When people go bankrupt, and have secured debts, the secured creditors can still take action against the secured property. For example, if a bank is owed money on a house mortgage, and the people buying the house do not pay, the bank can go ahead and sell the house, whether or not the people are bankrupt. In the same way, a finance company can repossess a car if the person paying it off does not keep up the payments, irrespective of bankruptcy, if the car loan is secured on the car.

If a lender uses a mortgage to take property and sell it, but there is still a shortfall after the sale, the remaining debt is an unsecured debt dealt with in the same way as any other unsecured debt.

DECIDING WHETHER OR NOT TO BECOME BANKRUPT

The decision whether or not a person should become bankrupt is one that should be made only after thoughtfully considering the advantages and disadvantages, and applying them to the particular person’s circumstances.

Even two people in similar financial circumstances may make a different decision, because their outlook or prospects in life are different.

For some people, the threat of a Sheriff coming into their home and taking their car or some of their household furniture, or the possibility of their wages being taken under an earnings attachment order, is overwhelming. For them, bankruptcy may be far preferable. For other people willing to rough out these processes, the freedom of not being a bankrupt may be more important.

Bankruptcy is more attractive to older people, with few prospects of going into business, or wanting to borrow in the future. Bankruptcy is less attractive to younger people, who may find it a disadvantage ten or fifteen years later, if they then want to go into business, or borrow a large sum. The fact that a person was once bankrupt, even many years before, does put off some prospective lenders. Another aspect to be considered in the case of younger people is their employment. A person who is bankrupt or has been bankrupt is unable to work in many fields, and this should be taken into consideration at the time of making a decision to become bankrupt.