Guide To Bankruptcy

What is bankruptcy? 

This article explores the personal side of insolvency with a look at bankruptcy. Every year many thousands of people are faced with bankruptcy and in this feature we aim to explain the process and show that it may not be the disastrous event that many people fear.

Although it can be a difficult decision to make, bankruptcy gives the opportunity to start again and get your personal financial affairs in order to be able to move forward.

Is it possible to avoid bankruptcy?

It is possible to avoid bankruptcy in some cases by getting creditors to approve an Individual Voluntary Arrangement (an ‘IVA’). This is a contract between a debtor and the creditors where over a set period of time (usually five years), creditors will accept a lesser amount than what is due to them.  Although an ‘IVA’ is not suitable for all debtors, if there are assets that can be sold or re-mortgaged or the individual has regular income bringing in additional sums after all monthly bills are paid, then an ‘IVA’ is a suitable alternative to bankruptcy.

How do I become Bankrupt?

The decision to become bankrupt is not easy and if an individual owes more than £750 then the creditor can petition the court for the debtor to be made bankrupt. It can cost a creditor several thousands of pounds to make an individual bankrupt and it is not something that a creditor does lightly. It is recommended that advice is taken from a qualified Licenced Insolvency Practitioner before making the final decision.

In addition, there are many organisations that provide free advice to individuals contemplating bankruptcy which can be found from the following link:

http://www.bis.gov.uk/insolvency/personal-insolvency/bankruptcy-what-is-bankruptcy/advice-about-bankruptcy

What if I then decide to go Bankrupt?

If the decision is then made to apply for bankruptcy, the process is straight forward but there are costs involved. A detailed explanation “How to do I make myself bankrupt?” can be found at;

http://www.bis.gov.uk/insolvency/personal-insolvency/bankruptcy-what-is-bankruptcy/how-do-i-make-myself-bankrupt/petition

What are the consequences of Bankruptcy?

Upon the bankruptcy order being made the Official Receiver will contact you to arrange an interview to go through in detail with you all your financial affairs and to deal with your assets and liabilities.  The Official Receiver will then contact your creditors and any financial institutions where you hold an account to advise them of your bankruptcy. You should then stop using any bank accounts, credit cards and other similar accounts immediately. Banks will automatically freeze your account when they hear or receive notification about your bankruptcy order.

This is not something the Official Receiver does. If the Official Receiver decides that you need the money in the account for necessary living expenses, he/she can instruct the bank to release it to you. It is often the bank’s decision to then decide if they will let you carry on using the account. Please note you cannot ask for credit of £500 or more from anyone without telling them that you are an undischarged bankrupt.

If you live in rented accommodation, your landlord will not always be told of your bankruptcy unless you are in arrears with your rent, provided you have an assured, protected or secure tenancy agreement. You may need to show your tenancy agreement to the Official Receiver for him to establish the terms of the agreement.

If the property is not protected, assured or secure it is likely that the Official Receiver will contact your landlord. This is because the trustee of your bankruptcy estate may need to disclaim any interest in the property.

What about my employment?

With regards to employment, you may not act as a director of a company or take part in any of its formation, promotion or management unless you get the permission of the court.

If you are an employee of a company, the Official Receiver does not usually have to contact your employer but it is advisable to tell your employer what is happening. If you are self- employed, trade in a partnership or carry on any business in a name that is not the name in which you were made bankrupt, you must notify everyone you do business with (regarding the name in which you were made bankrupt). It is also imperative to seek advice if a bankrupt holds a professional qualification as this may have an impact.

How are assets dealt with?

When you are made bankrupt any assets that you own are automatically ‘vested’ in the trustee in bankruptcy, which in the first instance is the Official Receiver. This means that they become the property of your bankruptcy estate and you cannot sell or otherwise dispose of such assets. Certain assets not included in your bankruptcy are;

  • Bedding, furniture, clothing, any household equipment and other basic items that your family need in the home.
  • Vehicles, books, tools and any other items of equipment which you need personally for your employment, business or vocation.

The assets that form part of your bankruptcy estate and are claimed by the trustee will not be returned to you. These assets will be used to pay your creditors and if in the unusual event there are remaining funds once the creditors have been paid (including interest) and the costs and expenses of the bankruptcy have been paid, these remaining funds will be returned to you.

If there is any equity in your principal residence and it is not realised within three years of the bankruptcy order, this will be returned to you. However, there are exceptions to this and you should contact your trustee directly to discuss this in more detail. 

 Will all debts be included in the Bankruptcy?

Please note not all debts are included in the bankruptcy proceeding and some debts can be excluded from the bankruptcy process;

  • Secured debts (mortgage)
  • Council Tax for the remainder of the current year (if not served with a liability order or final demand).
  • Liabilities from an order made in a family or domestic court, such CSA claims for child support are outside of bankruptcy.
  • Student Loans – Most educational loans cannot be discharged as they fall outside of the Insolvency Act 1986.
  • Court Fines imposed for an offence and liabilities from a confiscation order made under S.71 of the Criminal Justice Act 1988.
  • Debts from personal injury claims made against you.

Who will be my trustee in bankruptcy?

When you are made bankrupt, the Official Receiver automatically becomes your trustee in bankruptcy. However, in cases where a creditor specifically wants someone other than the Official Receiver to be the trustee, either by a meeting with your creditors or by appointment by the Secretary of State, a Licensed Insolvency practitioner will be appointed as the trustee in bankruptcy.

What are Income Payment Agreements/Orders?

As part of the bankruptcy procedure, the Official Receiver or trustee in bankruptcy will assess what income you have against what your outgoings are. If you have excess income over your expenditure you will be asked to make a monthly contribution into your bankruptcy estate. This is for the benefit of your creditors and the costs of dealing with the bankruptcy.

If no agreement can be reached it may be possible to seek a court order to arrange a fixed monthly amount (for a maximum period of three years).

When will the bankruptcy end?

When the bankruptcy ends, the restrictions imposed on you during the bankruptcy period are removed. However, the Official Receiver or the trustee in the bankruptcy can apply to court for a Bankruptcy Restriction Order (this means that some restrictions continue even though the debts have been discharged). Automatic discharge happens twelve months after the bankruptcy commenced.

Please note however, if you have not fully co-operated with the trustee or Official Receiver  the court may be asked to put a hold on the automatic discharge process until the Official Receiver is satisfied that everything has been concluded. Once discharged, you can obtain a certificate of discharge by writing to the court that dealt with the bankruptcy and requesting for one to be provided. Upon receipt of the discharge, you are then free from all of the debts that fell into the bankruptcy.

Conclusion

Bankruptcy can be an opportunity to make a fresh start and by far the best solution for many people rather than struggling on for years and years to repay debt. There is no disadvantage in seeing whether bankruptcy is right for you. In this article, it is not possible to cover all aspects of bankruptcy and it is always advisable to take specific professional advice about your individual circumstances.

If you have any questions about directors’ investigations, or would like to talk about this in more detail then please email me at vee@navigatebr.com or call on 01494 786 000 or 07961 116 321.

DISCLAIMER This blog / article is for information and interest only. It is not a substitute for full professional advice, which will take account of the specific and individual circumstances surrounding your matter. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.

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T: 01494 786000 - M: 07961 116321