| Index »Bankruptcy |
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| Bankruptcy |
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| If you have debt problems, you may be thinking about the possibility of bankruptcy. Bankruptcy isn't permanent, so you may choose it as a way of clearing your debts and making a fresh start.If your situation is so hopeless that it is clear that you will eventually be made bankrupt by one of your creditors, or your debts are a constant cause of worry and the situation will not improve, then you might consider making yourself bankrupt. Bankruptcy is a way in which the law may deal with a person who is unable to pay their debts. |
| Recent legislation allows for your automatic discharge from bankruptcy after one year, although most people will remain bankrupt for between six and nine months. Details will, however, remain on your credit file for six years. In certain instances, The discharge may be postponed. i.e. where the Official Receiver has not completed his enquiries, where a debtor has not cooperated with him/her or where the debtor is subject to a criminal bankruptcy order. Even after the bankruptcy period you may find it difficult to obtain credit. The bankruptcy order will be registered with credit reference agencies for at least six years and even after this time you may be asked whether you have ever been bankrupt before when applying for some credit, particularly a mortgage. Details of your bankruptcy are also kept on the Individual Insolvency Register for 3 months after the date of your discharge from bankruptcy. Details of your bankruptcy are usually published in a trade paper called "The London Gazette" and may also appear in the "classified" section of one of your local papers. |
| When you're bankrupt, your non-essential assets (property and possessions) and excess income are used to pay off your creditors (those you owe money to). At the end of the bankruptcy period, most debts are cancelled. Debtors are allowed to discharge all their debts after one year and it typically takes six months.Bankruptcy is the administration of the affairs of an insolvent individual by a trustee in the interests of his creditors generally. When a person becomes bankrupt the control of all his assets, with certain exceptions, passes to a trustee whose job is to sell them and distribute the proceeds to the creditors. |
| An application for a bankruptcy order may be made by any creditor owed more than £750, or by the individual himself. Subject to certain exemptions, once the order is made, control of the bankrupt's assets passes to the official receiver and then to the trustee. The bankrupt loses any rights to his property apart from any equipment needed by him for use in his business, and basic domestic equipment such as clothes, bedding and furniture, and certain pension rights. Before deciding to go bankrupt you should explore all of your alternatives, including an IVA and a Debt Management Plan. It's important to understand what bankruptcy is, and what alternatives exist. |
| If the insolvency is a result of circumstances beyond the debtor's control, such as disability preventing him or her from working, debts can be discharged in as little as three months, provided that the person has co-operated fully with the insolvency service, creditors have not called for further investigations and a bankruptcy notice has been filed. Debtors guilty of reckless behavior, such as racking up credit card debts on a holiday before declaring personal insolvency, can be hit with bankruptcy restriction orders which last between two and fifteen years and severely restrict a person's ability to get loans and credit cards. |
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| BANKRUPTCY PROCEDURES |
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| HOW TO MAKE YOURSELF INSOLVENT (How To Go Bankrupt) |
| If you make the decision to go bankrupt you should expect to follow the subsequent process. |
| At a Glance |
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Collect a bankruptcy application form from a county court and pay a deposit. Complete the forms (6.27 statement of affairs) Submit it to the form to your local court. |
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Pay the fees (Usually around £475) |
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Meet with an Official Receiver |
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Go to court to see a Judge |
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Become a Bankrupt. |
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| Bankruptcy Petition - The Process |
| If you wish to make yourself bankrupt, you can obtain a form from your local county court offices. It costs £325 deposit plus £150 as a court fee, payable in cash when you submit your form to the court. You can now fill in your bankruptcy petition and the statement of affairs on line. A court will hear the case, appoint an insolvency practitioner who will decide how much each lender will get and the period until the bankrupt's debts can be discharged. |
| Bankruptcy proceedings start with the making of a bankruptcy order by the court. Only the larger county courts deal with bankruptcy petitions so you may not be able to take your petition to your local court. If you live in central London you may have to take it to the High Court but the procedure is the same. There will then be a hearing in front of the district judge, which is often on the same day. The judge decides whether it is appropriate to make the order. |
| If the order is made you will then have an appointment to see the Official Receiver who deals with your bankruptcy, sometimes this will take place over the telephone. Immediately on the making of the order the official receiver takes over control of the bankrupt's estate pending the appointment of a trustee. A Trustee is appointed who gathers in your assets towards payment of your debts fairly between your creditors, according to certain rules. They will want to go through a long questionnaire with you to look at all your personal and financial details, such as your National Insurance number and pension policy details, income, outgoings and assets. |
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| Your Obligations |
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Give the Official Receiver details of your finances, assets and creditors |
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Look after your assets and hand them over to the Official Receiver with the relevant paperwork, such as bank statements and insurance policies |
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Tell your trustee (either the Official Receiver or insolvency practitioner) about any new assets or income during your bankruptcy |
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Stop using credit cards and bank or building society accounts |
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Not obtain credit over £500 without telling the creditor that you're bankrupt |
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Not make payments direct to your creditors (except mortgage arrears and outstanding child support payments) |
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| IMPORTANT ASPECTS CLARIFIED |
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| Official Receiver |
| An Official Receiver is appointed to protect your assets. They act as trustee of your bankruptcy affairs if you have no assets. The official receiver is an officer of the court and a member of The Insolvency Service, an executive agency within the Department of Trade and Industry. Where there are significant assets an insolvency practitioner will usually be appointed to act as trustee, either by a meeting of creditors or by the Secretary of State for Trade and Industry. Where no insolvency practitioner is appointed, or where there is a vacancy in the office of trustee, the official receiver acts as trustee. |
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| Insolvency Practitioner |
| If you do have assets, an Insolvency Practitioner will be appointed to act as trustee and sell your assets to pay your creditors. |
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| Court Attendance |
| There are two types of court which deal with bankruptcies. The High Courts and local County Courts. Under normal circumstances the petition will be heard in the court whose jurisdiction covers the area where you have lived for the better part of the last six months. Bankruptcy petitions are usually presented in the High Court in London or at a county court near where you live or trade (although not all deal with bankruptcy petitions). |
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| Fees |
| Ironically, For you to file a petition for bankruptcy. You have to pay the appropriate fees involved. The court fee is currently £150, administration costs are £325 and, if you go to a High Court a £7 fee is levied for the swearing of the statement of affairs. (The creditors use bankruptcy as a last resort as it usually means they will receive less money than is actually owed to them). Creditors also incur considerable expenses if they petition for a debtor's bankruptcy, much more than the £475 it would cost the debtor. If you are on a low income or certain benefits you may not have to pay the court fee. ie, If you are in receipt of benefits, you may have the £150 court fee paid. |
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| Assets |
| Once you're bankrupt, the Official Receiver, or appointed trustee, can sell your assets to pay your creditors. However, certain goods aren't treated as assets for this purpose. Eg. Assets such as equipment you need for your work (eg, tools or vehicles), Household items needed by you and your family (eg, clothing, bedding and furniture) |
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| Earnings And Ongoing Commitments |
| The Official Receiver can look at your income (taking into account expenses such as your mortgage, rent and household bills) and decide if payments should be made to your creditors. You may be asked to sign an 'income payments agreement' to pay fixed monthly instalments from your income for three years. If you don't pay (or if you don't sign the agreement voluntarily), the Official Receiver can apply for an income payments order from the court to order you to pay - running for at least three years from the date of the order.If your circumstances change, you'll need to tell the Official Receiver, so they can review these arrangements. You'll still have to meet ongoing commitments such as rent or debts incurred after you become bankrupt. |
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| Enterprise Act & New Bankruptcy Rules. |
| Bankruptcy is a way of dealing with debts that you cannot pay. Whilst you are bankrupt any assets that you have might be used to pay off your debts. After a period of time (usually one year) all of your outstanding debts are written off and you can make a fresh start. The effects of going bankrupt are the same whether you file your own petition or are made bankrupt by your creditors. Many of the bankruptcy rules have changed from April 2004 under the Enterprise Act. In the biggest shake-up of personal insolvency laws for a generation, the Enterprise Act 2002 marks the end of the one-size-fits-all approach to bankruptcy. It has introduced a fairer regime for those who have failed through no fault of their own, backed up by tough new measures for the minority of bankrupts who take advantage of their creditors and the public. |
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Provided for the automatic discharge of most bankrupts after a maximum of 12 months; |
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Introduced Income Payments Agreements (IPA) - a new way of repaying debts to creditors from the bankrupt's income; |
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Introduced fast track voluntary arrangements, enabling the bankruptcy order to be annulled in return for increased or speedier returns for creditors; |
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Removed unnecessary restrictions on bankrupts; and Limit to three years the period in which a trustee may deal with a bankrupt's home. |
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| From 1st April 2004, a bankrupt will be automatically discharged from bankruptcy after one year. A bankrupt may be discharged earlier than one year if the Official Receiver's investigation is concluded before then or is not needed. However, the principle of 'can pay, will pay' still applies. |
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A bankrupt will still risk losing their home and possessions, which will be sold to pay outstanding debts. |
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Face severe restrictions on their finances, such as getting a mortgage, bank account or future credit. |
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Have their bankruptcy advertised and recorded on a public register that anyone can search. |
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Make ongoing payments to creditors where possible and face prosecution if they are found to be dishonest. |
| In most cases, bankrupts will have to make payments to creditors from their income for three years. Currently a court order is needed to arrange such payments, but under the new rules, a system of Income payment agreements (IPAs) will make it much easier for bankrupts to make such payments. The Enterprise Act also introduced Bankruptcy Restriction Orders (BRO) as a way of dealing with bankrupts who are dishonest or reckless. BROs will cover a wide variety of conduct. They will last between two and 15 years and impose restrictions on obtaining credit of more than £500 without disclosing status, trading in a name/style other than the one in which the bankruptcy order was made and acting as a director. Breach of an order will be a criminal offence. |
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| A Creditor Making You Bankrupt |
| A creditor can make you bankrupt if you owe £750 or more to that creditor and you have not been able to agree how to repay the debt. Creditors can alo club together to make you bankrupt but this is rarely done. You can also be made bankrupt if your Individual Voluntary Arrangement (IVA) fails. Before presenting a Bankruptcy Petition a creditor must send you a "Statutory Demand". A Statutory Demand is a pre-court form that requires you to either:
pay the demanded amount offer to secure the debt against any property you own (create a voluntary charge) offer to pay the debt in a way that is satisfactory to the creditors (for instance by instalments) Statutory Demands can be hand delivered or posted. Statutory Demands are sometime used by the creditors as a bluff to try to get you to pay the debt quickly. The creditor may not actually apply to make you bankrupt. This is because it does not cost very much for a creditor to send you a Statutory Demand but the creditor would have to pay large upfront fees to make you bankrupt. |
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| Setting Aside A Statutory Demand |
| Twenty-one days after a Statutory Demand is served, the creditor can apply for a bankruptcy order through the county court. However, you can apply to have the Statutory Demand "set aside" in certain circumstances - for example if your debt is below £750 or there is a dispute about the money owed. If you have been sent a Statutory Demand you should check if you can set this aside. |
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| Discharge From Bankruptcy |
| You are normally discharged from bankruptcy automatically after one year as part of the bankruptcy arrangements, you may be ordered to make payments from your income, or any other money you receive, towards payment of your debts. Such agreements will usually last for three years. They can be modified if your circumstances change. This means that you are likely to be making payment even after you have formally been discharged
Until you are discharged, you may not hold certain positions such as being a company director, or seek to borrow over £500 without disclosing that you are a bankrupt . |
| Under the Enterprise Act 2002, if you go bankrupt on or after 1 April 2004 you will usually be automatically discharged from your bankruptcy after 1 year however much you owe. If you co-operate with the Official Receiver this can happen even earlier. These rules do not apply if you have had a previous bankruptcy or your automatic discharge has been suspended. This may be because the Official Receiver stops your discharge going ahead if you do not co-operate whilst bankrupt. If you need proof of your discharge you can ask for a Certificate of Discharge. You can also apply to have your bankruptcy order annulled if you have paid all the debts and expenses of the bankruptcy in full, or a bankruptcy order should never have been made. |
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| The Effects Of Bankruptcy |
| You will usually have to close your bank or building society account when you are made bankrupt. You may be able to open another one as long as the bank or building society allows you to, and the Official Receiver gives you permission to do so. It is important to wait to open the account until after you have gone bankrupt and got the Official Receiver's permission. Gas, electricity and telephone companies usually want you to pay in such a way that involves you not having credit. If you live with a partner you could transfer the account into their name. Sometimes a deposit is also asked for as security. |
| A business that is trading will normally be closed down. You can continue to be self-employed but some people find it difficult if it is the type of work which involves using credit of more than £500. This can include having time to settle bills e.g. allowing 30 days to pay. Depending on the type of job that you do, your employment may be affected. Always check your contract of employment to see if bankruptcy is mentioned. You can also ask your staff welfare officer or trade union if you are uncertain. If you belong to a professional body which prohibits bankruptcy you could be struck off, e.g. solicitors or accountants. If you handle money as part of your work at your employment , The employment could be at risk. If you work in the finance industry you will lose your consumer credit licence. |
| Even after the bankruptcy period you may find it difficult to obtain credit. The bankruptcy order will be registered with credit reference agencies for at least six years and even after this time you may be asked whether you have ever been bankrupt before when applying for some credit, particularly a mortgage. Details of your bankruptcy are also kept on the Individual Insolvency Register for 3 months after the date of your discharge from bankruptcy. Details of your bankruptcy are usually published in a trade paper called "The London Gazette" and may also appear in the "classified" section of one of your local papers. |
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| Bankruptcy Restriction Orders |
| Bankruptcy also imposes a number of restrictions on what you can do. |
| A Bankruptcy Restriction Order means you are not allowed to: (It a criminal offence) |
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Apply for credit over £500 without telling the lender about the order |
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Become an MP or local councillor |
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Be a director of a company or form a new company without permission |
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Be an Insolvency Practitioner. |
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You can't act as the director of a company or take part in its promotion, formation or management unless you get the court's permission to do so Bankruptcy Restriction also means |
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You can't conduct business directly or indirectly in any name other than that in which you were made bankrupt. |
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| A Bankruptcy Restriction Order does not stop the Official Receiver from taking criminal proceedings for an offence such as selling goods you have
on a hire purchase agreement or putting false information on a loan application. Under the Enterprise Act you will usually be discharged from bankruptcy after one year. New rules have been brought in that give the court power to make a Bankruptcy Restriction Order against you if the Official Receiver feels your behaviour has been dishonest in some way or there has been "unfit" conduct. A Bankruptcy Restriction Order can last for between 2 and 15 years and will appear on a public register. If you break the order it can be a criminal offence. |
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Not keeping proper accounts for your business in the two years before you go bankrupt |
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Trading whilst you knew you couldn't pay your debts |
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Gambling. |
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Taking out credit which you knew you couldn't pay. |
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Giving away your assets to avoid them being included in the bankruptcy |
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Paying some creditors over others. |
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Failing to co-operate with the Official Receiver |
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Concealing property from the Official Receiver. |
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| Your Home And Bankruptcy |
| Your home is an asset which is at risk if you are made bankrupt. If the value of your home is greater than the debts secured on it, the Trustee in bankruptcy will look to realise your beneficial interest. This will be achieved by: |
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Asking you or your family and/or friends to raise the funds required. |
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Asking you to sell your home by placing it on the market or |
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Obtaining an order for possession and sale. |
| If you live in rented accommodation the Trustee has no interest in the property. As long as you comply with the tenancy agreement you should be able to stay. However the trustee may inform your landlord you are bankrupt. There may be a clause which allows your landlord to end the lease if you are made bankrupt. If you own your home (alone or jointly), and it is worth more than the amount owed on any mortgage(s) and other loan(s) charged on it, then there is equity in the property and your Trustee will probably want it sold so that the equity can be used to pay your creditors. If your wife, husband or children are living with you, then you are usually given 12 months before any sale can take place. |
| Generally speaking, if the bankrupt has equity in a house, it may have to be sold. However, the law discourages a trustee from taking steps to force a sale through the court during the first 12 months of the bankruptcy where the bankrupt is married or has young children living with him. The trustee has three years from the date of the bankruptcy order to sell the house or otherwise deal with the bankrupt's interest in it. If he does not do so within that time, the property will revert to the bankrupt. And if the value of the equity is less than £1,000 the trustee will not be able to sell it at all. This is to give you time to make other living arrangements, and to see whether a relative or friend might be able to buy your interest in the property from the Trustee, which avoids a sale. |
| If there is no equity in the property, because its value is lower than the loan(s) charged on it, then your Trustee may obtain a charging order on the property. You are allowed to remain living there, but the Trustee then has an interest in the property which will be restricted to the value of the equity at the time of the charging order plus statutory interest until it is realised. There is no time limit for realization but the benefit of any rise in property values will not accrue in full because of the restriction. There will therefore be little incentive for a trustee to delay realization until years afterwards as was previously the case under the old rules. However any uncertainty can often be avoided by arranging for a relative or friend to buy your interest in the property for a small amount, soon after the bankruptcy order. Generally trustees now have to deal with interests in property within 3 years or that interest will revert to the bankrupt. |
| Once you have gone bankrupt your interest in your home is transferred to the Official Receiver or trustee. This enables them to sell the home.
If you are the sole owner then the whole of the value of the property is transferred to the Official Receiver or trustee. With jointly owned property the Official Receiver is usually only entitled to the bankrupt person's share of the equity. This is called your "Beneficial Interest". Depending on your circumstances, you may be considered to have a "beneficial interest" even if you are not named on the mortgage. It is very important that your beneficial interest in your home is bought out as soon as possible or the Official Receiver may be able to sell the house, even if you have been discharged from bankruptcy. |
| If someone is willing to buy your beneficial interest in the home they should contact the Official Receiver or the trustee who is handling your bankruptcy. The Insolvency Service runs a low cost conveyancing scheme to organise the transfer of your beneficial interest to someone else. There are various fees to pay to cover the costs of this. You will also have to agree with the Official Receiver how much your beneficial interest is worth before this can go ahead. If there is negative equity or no equity in the property then the value of the beneficial interest can be set at a minimal amount of £1.00. For details of this scheme there is a leaflet called "What will happen to my home?" available from the Insolvency Service. If you cannot save your home through someone buying out the Official Receiver's interest, the property is likely to be sold. |
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| New Rules From April 2004 |
| If you went bankrupt before April 2004 then it was the case that the Official Receiver could come back at any time in the future and sell your property. This has now been changed. The Official Receiver has 3 years from 1 April 2004 to deal with their interest in your property. After this date, if no action has been taken, your home will belong to you. This will apply to you if you are already bankrupt on that date or are made bankrupt in the future. |
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Come to an agreement with you about the property |
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Sell your home |
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Apply for an order for sale |
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Apply for a charge on your home. |
| This means that you should not be left with the possibility of the Official Receiver coming back years after your bankruptcy has ended, wanting to sell your home unless a charge is placed on your home. In this case the Official Receiver has 12 years to ask for an Order for Sale. |
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| Bankruptcy And Public Advertisement |
| Your bankruptcy will be published in the London Gazette and in a national and/or local newspaper. So some people will become aware that you have been made bankrupt which may be embarrassing. The bankruptcy will be noted by the credit reference agencies, making it difficult for you to borrow money for about six years after you have been discharged. |
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| Bankruptcy & Hire Purchase Agreements |
| There may be a clause in the hire purchase agreement which allows the hire purchase company to terminate the agreement if you become bankrupt. In this event, you will have to return the item. If you wish to keep the item, it is possible for the hire purchase company not to cancel the agreement and for the trustee to allow you to continue to make payments. |
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| Pensions |
| The law has been changed, and if you went bankrupt after 29.5.00 then personal and occupational pensions should be unaffected by bankruptcy. You will be able to keep your pension fund except in rare cases where someone has paid huge amounts into their pension to try and stop creditors taking their savings. |
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| Bankruptcy And Your Work |
| After bankruptcy, most employees may continue in the same job as before, and quite often their employer will not even be aware that they have been made bankrupt. However, in certain jobs it is a condition of your contract that your employer is informed, and your contract may be terminated. And you cannot continue working as a company director.
If you are self-employed, working on your own, you may be able to continue as before. You will usually be allowed to keep the necessary tools of your trade. However, in certain professions such as accountancy or estate agency, you may be prohibited by your professional body from continuing to practice while bankrupt. If you run a business employing staff, owning valuable trading stock or relying substantially on trade credit, this will probably be closed down or sold by your Trustee. |
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| Tax After Bankruptcy |
| As a general rule, the tax due for all tax years up to and including the tax year in which you are made bankrupt will be due from your Trustee - from the money he is able to raise - and not from you personally. So if you are employed and paying tax under Pay As You Earn (PAYE), you should ask your tax office to put you onto a 'Nil' tax code immediately after the bankruptcy order. You should then be paid without income tax taken off for the remainder of the tax year. If for any reason this does not happen, and some tax is deducted after bankruptcy, this should be refunded to you by HM Revenue and Customs. However, if you move to a different employer, this rule ceases to apply and tax should be deducted on an 'emergency' basis. If you are self-employed, your duty to pay tax directly to HM Revenue and Customs will no longer apply to the tax year of bankruptcy or any previous year. you start paying tax directly from the following tax year. One exception to the last rule affects self-employed workers in the construction industry, who have tax taken off their earnings at a flat rate of 18%. This deduction continues after bankruptcy, and the amounts that are deducted between your bankruptcy order and the following 5 April are paid by HM Revenue and Customs to your Trustee. |
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| Tax Credits And Bankruptcy |
| The issue here is what happens when there are tax credit overpayments and the claimant becomes bankrupt. Is the liability to repay a tax credit overpayment extinguished by bankruptcy? The position can be complex and it would be a good idea to take advice. In outline, the position is as follows. For a joint claim, where only one of the claimants becomes bankrupt, the overpayment is likely to be recovered in full from the other joint claimant For a joint claim where both parties become bankrupt, or for a single claim where the individual becomes bankrupt, then the key issue is whether a formal notice to recover the overpayment is made before or after the date of bankruptcy. If the formal notice of recovery is made before bankruptcy, then the overpayment is a bankruptcy debt. If there is an ongoing award, the overpayment will be recovered from the award, but only until the date of discharge from bankruptcy. |
| The claimant will need to tell the Tax Credit Office when this happens. Any amounts deducted from an ongoing award after this date should be returned to the claimant. If there is no ongoing award, then the overpayment will be proved in the bankruptcy. In these cases the claimant is released from the overpayment on discharge from bankruptcy. If the formal notice of recovery is made after the date of bankruptcy, then the overpayment is not a bankruptcy debt and can be recovered either by direct recovery action or from an ongoing award. In this case, recovery of the overpayment continues, even after discharge from bankruptcy. What this means in practice is that in-year overpayments (viz. those which are recognised before the end of a tax year of claim) will not be treated as bankruptcy debts, as the formal notice to recover the overpayment will not have been issued at the date of bankruptcy. Overpayments from previous tax years can be bankruptcy debts once the formal notice of recovery has been issued (under s29 Tax Credits Act 2002). These debts will be extinguished by bankruptcy, but they can be recovered from ongoing awards until the date of discharge. |
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| Will I have To Pay Anything From My Wages? |
| This will only happen if your income is above the average and appears that you might have available income after paying ordinary household expenses. The Official Receiver can look at your income and expenditure and decide if payments should be made and at what level. When looking at how much you could pay they will take into account essential expenses such as your mortgage, rent, household bills and housekeeping. |
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| Please note that the topics covered in this section are a general guide and should not be taken as any recommendation or solution. It is not a full and authoritative statement of the law. Suitability of any solution will depend on your personal circumstances. Please seek appropriate expert advice before relying on them. The information contained in this section is of a general nature and no assurance of accuracy can be given. The Author does not render legal or insolvency services.They are subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. |
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