Consumer rights: Bankruptcy is not necessarily the best way to clear your debts

There may be other options for those who find themselves in serious financial difficulties

Bankruptcy allows you to get free of debt and make a fresh start, but it can mean losing your assets, including your home, to pay your creditors. There are also restrictions on what you can and can't do while you're bankrupt. It isn't an easy option.

It is up to the court (usually a county court) to decide whether or not you can go bankrupt or be made bankrupt. You can apply to the court yourself, or someone you owe more than £750 to, can apply.

The court will give an official receiver or an insolvency practitioner responsibility for administering your bankruptcy (the trustee). You have to give that person information about everything you own, what you owe and any money you have coming in.

You'll have to stop using your bank account and credit cards (you may open a new bank or building society account but you should tell them you are bankrupt and they may impose conditions and limitations on your account) and you won't be able to get credit. You will usually be allowed to keep any tools and equipment you need to do your job or run your business, and your household goods, unless they're valuable in which case you may have to replace them with cheaper items. The trustee will tell your creditors how much money (if any) will be shared out in the bankruptcy. Creditors then have to make formal claims.

If you own your home it may have to be sold to go towards paying your debts. If you are self-employed your business is normally closed down. However, you can start to trade again as a self-employed person. Whether employed or self-employed you may have to make contributions out of your income towards your debts for up to three years even if your bankruptcy is discharged sooner.

While you are an undischarged bankrupt it's a criminal offence to borrow more than £500 without telling the lender you're bankrupt, carry on a business in a new name without informing everyone you deal with that you have been made bankrupt, set up, run or be a director of a limited company, or hold certain public roles such as a trustee of a charity or pension fund.

You will be automatically discharged from bankruptcy after a maximum of 12 months unless you don't stick to the rules in which case your discharge could be delayed. Discharge releases you from most of the debts you owed at the date of the bankruptcy order. Once you're discharged you can borrow money or carry on business again.

However bankruptcy isn't the only option if you in serious debt. You could work out an informal arrangement with your creditors such as a debt-management plan. This might work if you have very little money to repay your debts; if you're having debt problems now but are likely to be able to make the normal repayments again in a few months; or you can't afford the full monthly repayments but can afford a smaller regular amount each month. The drawback is that it isn't legally binding. Your creditors may not accept your offers of smaller repayments and they could still ask you to pay in full at some later date.

An individual voluntary arrangement (IVA) is a legally binding version of the informal arrangement and is drawn up by a licensed insolvency practitioner. It's useful for people who can't make full repayments but have some money to give their creditors each month. If your creditors agree to an IVA, some of your debt may be written off.

If one or more of your creditors has applied to the court and been granted a county court judgment against you, the court may make an administration order. Under the order you make regular payments to the court. If you don't pay regularly, the court may cancel the order and your creditors can take action against you separately to get back what you owe them.

A debt relief order is for people who can't pay their debts, owe up to £15,000, don't have assets worth more than £300 and have £50 or less left over each month after paying your bills.

You'll find more information about debt at www.moneyadviceservice.org.uk Helpline: 0300 500 5000 and about insolvency at www.bis.gov.uk/insolvency

***

Q: A firm has offered me work in a call centre dealing with customer queries on a zero-hour contract. I've done this before and like the work but apparently I won't be guaranteed any hours. If I don't work I don't get paid. The worst bit is they expect me to be on call at home or on my mobile and I'm not allowed to work for anyone else in case I'm needed. I've been trying to get off benefits since my last child went to school and I'm desperate to get back to work.

FK, Luton

A: This kind of working can play havoc with everyday life. Legally, if you're on a zero-hours contract you are entitled to be paid for any time you have to be on work premises waiting for work to come up, unless your contract of employment says otherwise. You should be paid your normal hourly rate or, at the very least, the national minimum wage. However, I suspect your contract will say otherwise. It will be difficult to keep on top of the bills and rent, etc, when you have no idea what will be coming in from week to week. You will have to have a reassessment of your welfare benefits every week. However, if the zero-hours contract is a way back into full time work it might be worth a try. The only advice I can give you is to talk over the situation with a welfare benefits adviser and be clear what you are letting yourself in for.

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