Here's all you need to know about the complex way people get their debts written off, and how reality star Katie Price hopes to avoid bankruptcy herself.
What is bankruptcy?
Bankruptcy is a legal status whereby debts cannot be repaid.
In the UK being bankrupt is limited to applying to individuals but in the US and some other countries, it can be applied to companies as well.
The word itself is derived from the Italian phrase banca rotta meaning "broken bank".
In the modern world, it normally involves a restructuring of debts in an attempt to rehabilitate those who owe the money and sometimes continue with their business.
In most jurisdictions, people or companies are declared bankrupt by a court order.
Is it the same as insolvency?
Bankruptcy is just one type of insolvency in the UK.
There are two legal definitions of insolvency in the UK with one being where a business or individual’s liabilities (what you owe) exceed your assets (what you own), or, where you are unable to pay your debts as they fall due.
Additionally, there are several different types of insolvency, only one of which is bankruptcy, these include:
- liquidation (applies to a limited company or partnership)
- administration (applies to a limited company or partnership)
- company voluntary arrangement (applies to limited companies)
- partnership voluntary arrangement (partnerships)
- individual voluntary arrangement (individuals who can also be made bankrupt)
- debt relief order (where an individual owes less than £15,000)
Is Katie Price bankrupt?
The reality star managed to dodge bankruptcy in early August but was only given 12 weeks to stave off financial ruin.
The 40-year-old saw her once lucrative media empire fall apart after the downfall of her third marriage and the collapse of her businesses.
Her team appeared at London's High Court on August 7, when they submitted proposals for an individual voluntary agreement (IVA).
An IVA is a formal agreement which lets people with debt repay their creditors at an affordable rate in a bid to avoid bankruptcy.
Katie appeared in court on October 30 with plans for repayment that she hoped would allow her to avoid an asset sell-off.
After the hearing she was given time to negotiate a deal with the taxman over her finances by a judge at a specialist insolvency and companies court.
On December 4 it was revealed she has avoided bankruptcy after reaching a deal with her creditors.
A specialist insolvency and companies court in London was told the former glamour model has agreed a plan to pay back what she owes.
Lawyers representing her creditors told the court that her IVA proposal was accepted on November 30.
Katie very recently purchased a motorhome, which she could be forced to live in if she has to sell her £2m mansion.
Which famous people have gone bankrupt?
Several celebrities have gone bankrupt over the years, here are just a few of the big names who have filed over the years:
- Donald Trump has had six of his companies declared bankrupt during his years in business but has never filed personally
- Meghan Markle's dad Thomas filed for bankruptcy last year with credit card debts of £24,181
- 50 Cent filed for bankruptcy in 2015 despite once being worth an estimated £119million
- Former Westlife singer Shane Filan filed for bankruptcy in 2012 with £20.5 million of debt
- Lady Gaga was technically bankrupt during her Monster Ball tour in 2009
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