Bankruptcy is a serious situation and should never be considered lightly. There are generally two forms of bankruptcy, a debtors petition where the individual petitions the Court for their own bankruptcy, or a creditors petition where a creditor applies to the Court to make an individual bankrupt. In order to be adjudged bankrupt an individual must be deemed insolvent, i.e. unable to pay their debts as and when they fall due. A creditor may petition for an individuals bankruptcy if they are owed £5,000 or more. Once a bankruptcy order has been made against an individual then their creditors can no longer pursue them for payment.
Bankruptcy has two aims:
- To free the individual from their debts, with certain exceptions, to enable them to make a fresh start.
- To ensure that all the individuals assets, such as property and investments, are distributed fairly among the creditors.
The assets of the bankrupt individual fall under the control of a trustee. This will be either the Official Receiver (a civil servant and officer of the Court), or a licensed insolvency practitioner. Whoever is appointed becomes responsible for uncovering as much as possible about the debtors assets and liabilities and then maximising returns for the creditors from the assets available, within certain guidelines. This will include the individual making payments from their income for 3 years if they can afford to do so. Assets held on trust for someone else are also excluded from the bankruptcy.
Bankruptcy usually lasts for 1 year, but the Official Receiver or trustee can ask the Court to extend the bankruptcy in certain circumstances. The Official Receiver also has to consider the conduct of the individual and can apply to the Court for a Bankruptcy Restriction Order if appropriate, which places restrictions on the individual for a period of between 2 and 12 years.
Once the individual has been freed (discharged) from their bankruptcy, then they are released from their debts, with certain exceptions. The exceptions are any creditors who hold security (legal charges) over the individuals assets, student loans, fines, debts arising from family proceedings and Department of work and Pensions (DWP) budgeting and crisis loans.
- When you are declared bankrupt the responsibility for paying your unsecured debts will be taken away from you. Creditors can’t take further action unless the debts are secured on your home or other property.
- You will normally be Bankrupt for 12 months. After that period you will be discharged and free from the restrictions of bankruptcy. You may however be required to make a monthly payment from your income towards your debt this will last for 3 years and your credit rating will be negatively affected for 6 years.
- You may be able to avoid having to sell your home if your spouse, partner or a relative can buy your share of its value after any debts secured on it have been paid.
- If you are a home owner with equity in your property your share of this will normally have to be realised for the benefit of your creditors.
- The following assets are exempt from the bankruptcy estate and you will usually be allowed to keep them:
- Vehicles, books, tools and other items of equipment which you need to use personally in your employment, business or vocation.
- Bedding, furniture, clothing, household equipment and other basic items that you and your family need in the home.
- Even though the above assets are exempt from the bankruptcy estate by law, it is possible that the trustee can claim and sell them if their sale value is worth more than the cost of a reasonable replacement. The trustee then has a duty to use funds from the bankruptcy estate to replace those assets.
- In addition to the normal asset realisations, the trustee has a wide range of powers under the IA 1986 to investigate events which took place prior to the bankruptcy. If there is sufficient evidence, his investigations may lead to the overturning of any transactions made at an undervalue (or gifts) or preference transactions. If assets are reclaimed by the trustee, they are treated as being part of the bankrupt estate, available to the creditors.
- You will remain liable to pay certain debts, in particular student loans, fines and some debts arising from family proceedings.
- The record of your bankruptcy remains on your credit file for 6 years meaning it will be difficult to obtain further credit during this time.
- You will be unable to act as a company director or be involved with the management of a limited company while you are bankrupt. Other professions that are affected by bankruptcy are solicitors, accountants, HGV operators and some roles in financial services.
- Once in an IVA, a debtor will be required to get permission from their IVA Supervisor should they wish to apply for any further credit in excess of £500.
- Bankruptcy is no longer publicly advertised in the local newspaper in England & Wales. As such it is now a discreet procedure similar to that of an IVA. However your name will still be recorded on the Insolvency Register which is publicly accessible via the internet. You will be removed from this register three months after being discharged.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the issues covered above.For further information, please contact one of our Client Services Team who will be able to assist you.