There are several types of personal insolvency and bankruptcy is one of them. Other types of insolvency include Individual Voluntary Arrangements, Trust Deeds, and in Scotland, Sequestration.

Insolvency can be defined as; someone who is unable to pay their debts as they fall due.

In most instances, bankrupts 'petition' the court for their own bankruptcy and there is quite a high fee for doing so. Creditors can also petition the court for bankruptcy and do not need to obtain a court judgment before doing so.

Bankruptcy is seen by many as a last resort. It rarely gives any payback to a lender, so many are reluctant to petition for it. Generally the threat of bankruptcy, as a means of pressure to persuade a debtor to start making some form of repayment, is enough.

Sometimes, however, an individual may welcome bankruptcy, the reason being that it will offer full legal protection against all creditors. In addition, it often provides a relatively quick way out of financial difficulties, with automatic discharge (for many) 12 months after the date of the bankruptcy.

In most instances, a bankruptcy will arise in the following circumstances:

The Bankruptcy Order is usually decided at a court hearing. During the hearing, the court can decide on a variety of options, including dismissing the bankruptcy petition, suspending the proceedings or referring the application to and Insolvency Practitioner, who will set up an IVA instead. If these are not deemed appropriate a Bankruptcy Order will be made. For petitions brought about by the debtor in England and Wales, the debtor can apply online. Following this, instead of the decision being made in court, the Official Receiver can adjudicate bankruptcy instead.

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Once the Bankruptcy Order is made, the person is 'bankrupt'. Bankruptcy records remain on a credit report for six years and on HM Land Registry/Registers of Scotland files for twelve years, whether you are discharged or not.

This will have a significant impact on the individual's ability to obtain credit. Also, any defaults appearing on the report, will not be marked as settled, the reason being that, usually, the debt will have been written off or paid at a reduced or agreed amount. Sometimes, if you contact the relevant lenders and provide a copy of your bankruptcy discharge certificate, they will be willing to mark the accounts as settled even though they are not bound to do so. Once a person is declared bankrupt, his or her financial affairs are managed either by a Trustee or by the Official Receiver, who puts together a Statement of Assets and Liabilities, and then works out how much can be repaid to creditors. This is usually a very small proportion of the amounts owing.

The law states that bankrupts cannot be pursued for any debts that have been included in the bankruptcy. This means that one of the benefits of being declared bankrupt is to put a metaphorical umbrella up to shelter from the pressures of being chased for debt.

Bankrupts may not practice certain professions (e.g. lawyers and accountants).

Lenders are permitted to lend small amounts to bankrupts (approximately £500) but few do. In fact, most automatically decline bankrupts, whether the bankruptcy is active, discharged or settled, as it has proven to be a strong predictor of future financial problems.