This is a formal insolvency procedure for individuals rather than Companies. You can make yourself Bankrupt (a Debtors Petition) or a creditor can present a Petition for your Bankruptcy. In either case the outcome is the same. The option of Bankruptcy is available to all individuals and covers both business and personal debt. Over the last few years Bankruptcy has been used more and more by general members of the public who are in financial problems with loans and credit cards and not just by business people who carry on business as sole traders or in Partnerships.
The basis of the procedure is that all the individual’s assets are sold in order to pay off debts. Some assets are excluded such as clothes, household items and furniture that is required for the normal domestic needs of you and your family. In addition you are entitled to keep your tools of trade, so that you can continue to make a living. Where matters become more tricky is in regard to your home (if you own it) and motor vehicles (if they are worth more than the suggested guidelines). These assets are potentially at risk. In addition, you may have to make a payment out of ongoing income if you earn more than is needed for the reasonable domestic needs of yourself and your family. This is called an Income Payments Order.
Initially, on becoming Bankrupt, your affairs will be managed by the Local Official Receiver. In some instances the case will then be transferred to a Licensed Insolvency Practitioner who will act as the Trustee of your estate.
The Trustee in Bankruptcy’s function is to realise whatever assets he can in order to be able to pay a dividend to creditors. In most instances the most valuable asset in a Bankrupt’s estate will be the Bankrupt’s share of the matrimonial home. If the Bankrupt has children living with him/her then it will not normally be possible to repossess that property until at least 12 months have elapsed. However, in some instances the property may be repossessed by the secured lender before that 12 months elapses if the mortgage has not been kept up to date.
If you own your home you do not automatically lose it if you go Bankrupt. All the Trustee in Bankruptcy will be interested in is your share of the equity in the property. If you can raise the money for this, you will be able to purchase the Trustee’s interest. which equates to your own equity, and keep your home. The source of these funds is often from the family although in certain circumstances it may be possible to get an additional secured loan on the property. Each case should always be considered on its merits, however, the following points are always relevant.
- Bankruptcy will not protect you from possession action by the mortgage Company if you do not pay the mortgage.
- The Trustee in Bankruptcy only has an interest in the Bankrupt’s share of the property. Unless there is evidence to the contrary, this interest will represent 50% of the equity if the property is jointly owned.
- You do not lose your home the day the Bankruptcy Order is made. The Trustee in Bankruptcy will contact you further in this regard.
How long does Bankruptcy last?
Usually you are Bankrupt for a year after which you are automatically discharged. This period may be extended if the Official Receiver believes that there has been some seriously culpable behaviour by the Bankrupt which means that he or she should be subject to the restrictions of Bankruptcy for longer. This is called a Bankruptcy Restriction Order (BRO). However, your assets are not returned to you if they have not been sold after your discharge, and the Trustee in Bankruptcy is still in control of them. If you are subject to an Income Payments Order then this is likely to continue as they tend to be for a period of three years and not just for the period of Bankruptcy.
What are the consequences of Bankruptcy?
There are some practical consequences of Bankruptcy which are set out below. However, there are others that are not quantifiable and mean more to some people than others. These tend to revolve around the so called ‘stigma’ of Bankruptcy where the Bankrupt may be concerned about how he or she is viewed by their peers.
The practical consequences are as follows:
- The Bankrupt loses control of all their assets other than certain exceptions relating to household effects and tools of a trade.
- It is an offence to obtain credit over £500 without disclosing your Bankrupt status.
- You cannot be a Director of a limited Company nor be involved with the formation, promotion or management of a limited Company. This also covers being a shadow Director which is where someone else is registered as a Director, but the Bankrupt maintains control of the business.
- It is likely that your bank account will be frozen although it should be borne in mind that there is no prohibition on having a bank account when you are Bankrupt.
- There may be certain rules and regulations set by your profession which may mean that it is not possible to continue in that employment. In these cases you will need to check with your professional body.
- Your credit rating will be seriously affected and it is likely that you will qualify for unsecured lending for a number of years.
Will I lose Control of my Wages?
You are allowed to earn money during your Bankruptcy to meet the reasonable domestic needs of you and your family. However, an assessment is carried out of your income and expenditure and the amount that you earn over and above what you require to meet those reasonable domestic needs will have to be paid over to the Official Receiver by way of an Income Payments Order.
Can I avoid Bankruptcy?
If you can afford to pay off your debts you should avoid Bankruptcy. This is because the costs associated with Bankruptcy are substantial and if you have enough money or assets to pay your creditors in full then these will be met from your surplus assets.
The ways to avoid Bankruptcy are as follows:
- Pay your debts or come to some agreement with your creditors as to how you will pay them.
- Consider a debt management plan (DMP). Debt Management Plans have been in existence for some while now and are run by firms who negotiate with your creditors on your behalf the basis upon which your debts will be repaid. They have no statutory basis and there is no protection from action by creditors who dissent from the process or who change their mind after the plan is set up. While DMPs can get interest frozen there is no statutory obligation on creditors to do this and they can change their mind if they so wish.
- Consider an Individual Voluntary Arrangement (IVA). This is a formal agreement with your creditors as to how you will repay them either in whole or in part. If 75% by value of your creditors agree to the Proposal you put forward then they will bind the 25% dissenting creditors. Such arrangements can only be run by Licensed Insolvency Practitioners and, unless otherwise stated in the Proposal, interest ceases to be charged.
Annulment of Bankruptcy
If you have been made Bankrupt in error then you can apply to have the Bankruptcy annulled. This requires specialist advice and any application to the Court should be made as soon as possible. If you have been made Bankrupt but have the resources to pay your creditors straight away then you can apply to have your Bankruptcy annulled but you will need to prove to the Court that you have dealt with all your creditors satisfactorily.
Liabilities not included within Bankruptcy
There are certain categories of debt which will not be included within the Bankruptcy and will survive. They are as follows:
- any fine under the Magistrates’ Courts Act 1980;
- any obligation under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991
- any obligation under a confiscation order made under the Drug Trafficking Offences Act 1986, the Criminal Justice Act 1988 or under the Proceeds of Crime Act 2002;
- a debt to the Student Loans Company
This means that you will still have to continue making payments for these debts and you will not be released from them when you are discharged.