Bankruptcy Petitions: When Should You Apply to Bankrupt a Debtor?
When chasing a debt, the strongest action you can threaten is a petition for bankruptcy. But when is it in your interest to do this? And when is it better to pursue other remedies?
Application for Bankruptcy
If an individual owes you more than £750, you can petition the courts to make them bankrupt. However, this limit will be raised to £5,000 from 1 October 2015.
For the application to succeed, you must prove that the debt exists, and the court must determine that the individual is unable to repay this debt.
You should also be aware that filing a bankruptcy petition incurs costs, both for the court proceedings and, if the petition is successful, the administration of the bankruptcy. However, you will be reimbursed if the sale of the debtor’s assets raises enough money.
What Does A Successful Application Mean for Creditors?
In the event of a successful petition for bankruptcy, the court appoints a trustee to collect the debtor’s assets and sell them. The proceeds of the sale are used to cover the expenses of the bankruptcy proceedings, with any remaining funds used to repay creditors where possible.
In most cases, creditors who petition for bankruptcy are unlikely to be repaid in full.
When Should You Apply to Bankrupt a Debtor?
Since petitioning for bankruptcy is a costly business, and is unlikely to lead to full repayment of the debt, it is not a particularly attractive option for creditors. However, there are certain situations where it makes sense to do so:
- If your debtor’s financial situation is dire, with no hope of recovery. But only where a sale of assets is likely to lead to at least partial repayment.
- If your suspect your debtor has the ability to repay, yet is simply refusing to do so.
Although this is a limited set of circumstances, it is worth noting that a bankruptcy petition has a useful deterrent effect. Debtors know that creditors may take ultimately take this action, which has severe consequences for them, so have a great incentive to repay.
Which Other Courses of Action May be More Suitable?
In most situations, other remedies are preferable to a petition for bankruptcy. Ultimately, the aim is to ensure the debt is repaid, and bankruptcy is unlikely to achieve this. Before you consider petitioning the courts, you should try:
- Communication: Letters, emails and phone calls to your debtor can be extremely effective.
- Mediation: A mediator can help resolve disputes out of court, which is less expensive than legal action.
- A Debt Collection Agency: Collection agencies like P&J Debt take charge of the whole debt recovery process for you. Since they are experienced professionals, they are more likely to achieve the best results.
Don’t Petition for Bankruptcy Unless You Have to
Although bankruptcy petitions have a useful deterrent effect, you should only consider filing one in certain severe situations. Where possible, try to reach an agreement with your debtors, as this is more likely to lead to repayment. And if you want to free yourself from all worries, consider using a debt collection agency to pursue what you’re owed.