There are many differences between the UK and the USA ranging from language, culture, laws to simple, everyday life, views on money and bankruptcy. It is hard to draw a line and decide which side is ‘’right’’ since there are many pros and cons on both ends of the spectrum.
What we will discuss are the differences between bankruptcy in these two countries and how it affects a company or a single person.
A helpful source of information Chang & Diamond, APC has been at our disposal to further and more precisely define the differences and also underline the similarities between these two systems.
What is bankruptcy?
Bankruptcy occurs when a person or a company is unable to repay debts to creditors. A debtor is the one to initiate the bankruptcy and in most cases, it is appointed by a court order. The two most common types of bankruptcy in the US are Chapter 11 and Chapter 7 bankruptcy.
Chapter 11 is a bankruptcy process which basically shields a company from creditors and lets it continue operating as nothing happened, the company itself retains the right to make business decisions and continue to trade. One could argue that US bankruptcy is, in a way, more forgivable than the UK’s. It is considered an alleviation, or in other words, a period of time needed for a company or a person to get back on their feet and make a profit again.
US laws provide a less strict approach to bankruptcy where an individual or a company can usually keep their residential property and a steady income of up to $10,000 a month which gives them the opportunity to settle their debts in a period of 3 months.
Common practice includes also making a deal with the creditors in order to ‘’forgive’’ a part of the debt for equity swap. An individual can be denied these benefits if they actually have enough resources to repay the creditors or if they take credit after applying for bankruptcy.
The story is different in the UK. The bankruptcy lasts 12 months in the UK (whereas 3 in the US). It is considered more strict and debtors don’t have as many rights than in the US, and the biggest difference between the two systems is that an individual cannot continue to operate their company, instead, a director is assigned to handle all the administrative decisions and finances. All the assets are examined and anything deemed worthy is sold in order to return money to creditors.
Another difficulty for the debtor is that the director has all the rights to do whatever they see fit, that even includes liquidation of the company. Bankruptcy in the UK also leaves some misfortunate consequences on an individual meaning that their credit status would be affected negatively for the next 6 years.
Also, entering bankruptcy in the UK is much easier and faster. The debtor has 21 days to settle a statutory demand and if their debt is higher than £5000 then the creditor has a green light to file a petition for bankruptcy.
To conclude, the major difference in bankruptcy between the USA and the UK is the amount of power debtor has. USA laws allow for less strict rules to which a debtor has to abide, meaning that they still retain administrative and some financial decisions, whereas those privileges are impossible in the UK where a neutral director is assigned to a company to basically do whatever they please. It is hard to determine which system is right, there are pros and cons in both.