Bankruptcy

What is Bankruptcy?

Bankruptcy is a method of dealing with debts which you can not possibly repay. It is normally seen as a last resort, after all other options for repaying debt have been exhausted. If you are declared bankrupt, you will no longer have to repay your creditors yourself and the court will protect you from any further actions that your creditors threaten against you.

Bankruptcy has a poor stigma attached to it because bankruptcies are publicly advertised and means that the bankrupt individual no longer has control over his/her assets. Your assets are shared out fairly between your creditors (those you owe money to). However, bankruptcy should still be considered as an insolvency option as it frees the debtor from overwhelming debts to make a fresh start (with a few restrictions). Bankruptcy can provide peace of mind by offering the chance to be free from debt after just twelve months.

If you do face bankruptcy, consider the alternatives. An Individual Voluntary Arrangement (IVA) is an alternative debt solution to bankruptcy.

There are two kinds of bankruptcy and two bankruptcy registers. Indvidual bankruptcy includes individuals, partners and sole traders. Commercial bankruptcies include insolvency procedures for companies and partnerships.

How Long Will Bankruptcy Last?

One year. If you were made bankrupt on or after 1 April 2004, you will be automatically discharged from bankruptcy after 12 months. This period may be shorter if the Official Receiver concludes his enquiries into your affairs and files a notice in court.

If the court annuls your bankruptcy order, you will immediately be free from bankruptcy. This can happen if your debts, plus bankruptcy proceedings fees and expenses have been fully paid, or if the order shouldn’t have been made in the first place.

Discharge from bankruptcy:

Releases you from most of the debts you owed at the date of the bankruptcy order (with exceptions including fraud related debts and fines).

Enables you to borrow money or carry on trading in business without previous restrictions opposed on you as a bankrupt. You can also act as a limited company director, unless you have been a previously disqualified director.

Dischargeable Debts And Non-Dischargeable Debts

Dischargeable Debts

A court can decide whether debts can be written off or ‘discharged’ in bankruptcy proceedings or in an Individual Voluntary Arrangement (IVA).

Dischargeable Debts include:

• Utility bills

• Back rent

• Some CCJs

• Credit card debts

• Loans from family and friends

• Newspaper and magazine subscriptions

• Legal, Medical and Accounting bills

• Most unsecured loans where there is no collateral

Non-dischargeable Debts

The Government has set out that some debts are non-dischargeable. These include:

• Fines and penalties

• Secured debts/loans

• Last minute debts (where a soon-to-be bankrupt person racks up credit with no intention of paying it back)

• CSA claims for child support and other family/domestic legal liabilities

• Liabilities under a confiscation order made under S.1 of the Drug Trafficking Act 1986 0r S.71 of the Criminal Justice Act 1988

• Most educational loans which fall outside of the Insolvency Act 1986.

If you were made bankrupt before 1 April 2004 and this is your first bankruptcy, you will have been automatically discharged on or prior to 1 April 2005.

If you have been an undischarged bankrupt before your current bankruptcy (unless the previous bankruptcy was annulled) you will automatically be discharged on 1 April 2009. If this is the case, you can ask the court for a discharge 5 years after the date of the bankruptcy order.

If you do not abide by the rules of bankruptcy and fail to carry out your responsibilities, the Official Receiver can apply to the court for your discharge to be postponed.

If unsure about when you will be discharged from bankruptcy, you can contact your local Official Receiver offices.

So, once made bankrupt – what can you no longer do?

You cannot:

• Control your own assets as you lose control of them.

• Obtain credit for over £250 without permission from the lender (your credit can in fact be affected for many years after discharge or annulment).

• Be a company director.

• Be involved in the promotion, formation or management of a limited company without permission from the court.

• Trade in any business under a different name unless all persons involved are informed of your bankruptcy.

• Practice as a Lawyer or Chartered Accountant

• Become a Member of Parliament (MP)

• Act as a Justice Of The Peace (JP)

• Become a local authority member.

How Bankruptcy Works

Anyone can go bankrupt. An individual can be made bankrupt voluntarily (themselves), involuntarily (by creditors owed a minimum of £750), or by the supervisor of an IVA, if the person going bankrupt has failed to meet the terms and conditions of their IVA.

Voluntary Bankruptcy

The first step is contact your local County Court (you will find the address and telephone number of your local County Court in the telephone book). You will have to ask the court for an application form. The court will also be able to provide you with further information. You will normally have to arrange a meeting at the court with a member of the Official Receiver’s office where you will discuss all aspects of your application. If the Official Receiver believes that you should go bankrupt then you will be able to do so on the same day. You must expect to pay a fee to the court of between £250-£350 towards the court fee and administration of your bankruptcy.

Involuntary Bankruptcy

Even if you refuse to agree to bankruptcy proceedings or refuse acknowledgement of proceedings against you, a bankruptcy order can still be made. Therefore, it’s it your own interest to full cooperate. Of course, if you do not agree with the creditor’s claim and wish to dispute it, you can attempt to settle before the bankruptcy petition hearing. If you wait until the bankruptcy order is made, attempting settlement is much more difficult and costly.

Bankruptcy Advantages

• Responsibility for paying your debt is taken away from you immediately and you are protected from your creditors by the court.

• You may have to make a monthly contribution towards your debt while you are bankrupt, but this is based only on what you can afford.

• You will normally be debt free in 1 year or less.

Bankruptcy Disadvantages

• You will have to pay an up-front court fee and administration charge to the court of between £250 and £300

• You will be required by the court to realise valuable assets including equity on your home, expensive jewellery, antiques, expensive cars, and so on. Essentially you lose control of your assets.

• Bankruptcy is a public proceeding and your name will appear in the local paper and the London Gazette.

• You cannot continue to practise as a professional person or a director of a company during the period of bankruptcy.

• A note of your bankruptcy will be kept on your credit file for 6 years, which means, even after being discharged (released) from your bankruptcy, you may find it difficult to get credit or a mortgage.

How to go Bankrupt

Filling in your own bankruptcy petition

If you wish to make yourself bankrupt you can obtain a form from your local county court offices. From 1 April 2007 it costs £335 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 online. You can complete the forms in stages and save the information for later. You then save your details online and print the forms off to hand in to the court in the usual way. The online forms service is provided by the Insolvency Service. www.insolvency.gov.uk

INFORMATION If you are on a low income or certain benefits you may not have to pay the court fee.

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.

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.

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 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 e.g. by instalments.

Statutory demands can be hand delivered or posted. Some creditors use them as a bluff to try to get you to pay the debt quickly, for example by borrowing elsewhere, but 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 up-front fees to make you bankrupt.

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.

ADVICE If you have been sent a statutory demand you should check if you can set this aside.

Do I have Assets?

Once you are bankrupt the official receiver, or appointed trustee, may wish to sell any assets you have.

INFORMATION Certain goods are not treated as assets. These are things such as clothing, bedding, furniture and household equipment for basic domestic needs.

Items necessary for you to carry on your employment such as tools, books or vehicles can also be excluded. If you have valuable household items such as antiques or expensive electrical equipment then these could be sold in order to raise money. You car might be sold if it is valuable but it can be exempt if it is necessary for your employment. You may have to buy a cheaper car instead.

If the official receiver decides you have assets then they will usually be sold as soon as possible.

If you are discharged from bankruptcy before any assets are dealt with they will not belong to you on discharge. Your assets will continue to belong to or 'vest' in the official receiver until they are dealt with.

INFORMATION The only asset treated differently is the house where you live.

Bankruptcy and Hire Purchase Agreements

There may be a clause in the hire purchase agreement that 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.

Pensions

Bankruptcy before 29 May 2000

If you went bankrupt before 29 May 2000 you need to be very careful if you have a personal pension. The whole of your future pension could be taken as an asset. This means that you would not get any future lump sum or weekly payments from the pension.

Bankruptcy after 29 May 2000

The law has been changed, and if you went bankrupt after 29 May 2000 then personal and occupational pensions should be unaffected by bankruptcy. You will be able to keep your pension fund except in rare cases where you have paid huge amounts into your pension to try to stop creditors taking your savings.

Property and your home

If you own property then this might be sold depending on whether it has any equity (value) in it. If your partner and children live there then the sale can be delayed for 12 months to give them time to find somewhere else to live.

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 may be possible for the joint owner or family and friends to make an offer to the official receiver to buy out your share of the equity. This is particularly helpful if there is little or no equity.

REMEMBER

• 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 cost 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.

• If you cannot save your home through someone buying out the official receiver's interest the property is likely to be sold.

• If your home has very little equity in it (up to a set level of £1,000), then the court will not be able to order a sale or put a charging order on your property. They still have up to three years to see if your house has risen in value and is worth selling. Try to come to an agreement with the official receiver over your beneficial interest as soon as you can to avoid this happening.

• If you have a mortgage or secured loan on the property the monthly payments still need to be maintained to stop your lender taking possession action.

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 changed. The official receiver has three 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.

The official receiver will have these options:

• come to an agreement with you about the property;

• sell your home;

• apply for an order for sale;

• 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 can ask the court for an order for sale at any time in the future. Otherwise, the charge will be paid off when you sell you home (if your house is worth enough to cover your mortgage and the charge).

Will I have to pay anything from my wages?

This will only happen if your income is above the average and it 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.

Income Payments Orders & Income Payment Agreements

Under the Enterprise Act most bankruptcy orders will end after one year. You may be asked to sign a legally binding agreement to pay monthly instalments from your income to the official receiver for three years from the date of the agreement. This is called an income payments agreement. If your circumstances change then you need to tell the official receiver as the agreement can be looked at again. If you do not pay the official receiver can go to court for an income payments order instead.

If you do not make a voluntary agreement then the official receiver can ask the court to order you to pay the instalments they want. This is called an income payments order and will run for three years from the date of the order. You can ask the court to look at this order again if your circumstances change.

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.

WARNING If you handle money your 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 three months after the date of your discharge from bankruptcy.

INFORMATION 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.

Bankruptcy Offences

Whilst you are bankrupt it is a criminal offence to:

• take out credit of more than £500 without telling the lender you are bankrupt;

• use a new business name without revealing the name you were made bankrupt under;
• act as a director of a company without permission;

• act as an insolvency practitioner.

Bankruptcy restriction orders

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.

WARNING A bankruptcy restriction order can last for between two and 15 years and will appear on a public register and on the Insolvency Service website www.insolvency.gov.uk. This is a searchable public register and your entry includes details of your name, address, date of birth and an outline of the reasons why a bankruptcy restriction order was made against you. It will also include information on how long the order will last. If you break the order it can be a criminal offence.

Unfit conduct can include:

• not keeping proper accounts for your business in the last two years before you go bankrupt;

• gambling;

• trading whilst you knew you couldn't pay your debts;

• taking out credit which you knew you couldn't pay;

• giving away your assets to avoid them being included in the bankruptcy;

• paying some creditors over others;

• failing to cooperate with the official receiver;

• concealing property from the official receiver.

A bankruptcy restriction order means you are not allowed to:

• apply for credit over £500 without telling the lender about the order;

• become an MP or local councillor;

• be a director of a company or form a new company without permission;

• be an insolvency practitioner.

WARNING 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 for putting false information on a loan application.

Discharge from Bankruptcy

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 one year however much you owe. If you cooperate with the official receiver this can happen even earlier.

WARNING 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 cooperate whilst bankrupt.

If you need proof of your discharge you can ask the court for a certificate of discharge but this will cost £60.

You can also apply to have your bankruptcy annulled if you have paid all the debts and expenses of the bankruptcy in full, or a bankruptcy order should never have been made.

Alternatives to Bankruptcy

Individual Voluntary Arrangements

An individual voluntary arrangement (IVA) is a formal arrangement through the county court and can be a way of avoiding bankruptcy. You need to be able to raise a lump sum to pay the creditors or to make regular payments from your income to your creditors.

To arrange one you need to find an insolvency practitioner prepared to work for you. The insolvency practitioner prepares a proposal to put forward to your creditors. If the creditors who are owed 75% in value of your debts, who choose to vote, agree to accept the proposal then the IVA is put in place.

INFORMATION An IVA will usually last for three to five years. If the arrangement is not kept to, the insolvency practitioner or your creditors can apply for a bankruptcy order to be made instead.

Insolvency practitioners' fees can be expensive and they will usually want some payment in advance. It is worth asking them for an initial free meeting to discuss whether an IVA is appropriate.

INFORMATION You can obtain names of local insolvency practitioners by contacting the court offices, official receiver in your area,

WARNING Be careful of companies who offer to put you in touch with an insolvency practitioner for an up-front fee. You can contact an insolvency practitioner yourself without paying a fee to a third party.

Fast Track Individual Voluntary Arrangements (FTVA)

Even if you have been made bankrupt it is still possible to have a special form of IVA called a fast track individual voluntary arrangement (FTVA), which means your bankruptcy order can be annulled. You have to put forward a payment proposal to your creditors that would mean they will be paid more than they would under your bankruptcy.

The official receiver runs the FTVA for you if they agree with your proposal. The FTVA is cheaper then an ordinary IVA as there are set fees and costs. If it fails then your creditors could try to make you bankrupt again.

WARNING You need to carefully weigh up the advantages and disadvantages of asking for an FTVA. Phone us for advice.

Informal arrangements and Debt Management Plans

If bankruptcy or an IVA are not suitable options you may be able to make informal arrangements with your creditors. Our self-help pack 'Dealing with your debts' goes through how to negotiate with your creditors. If you have not had a copy of our pack, phone us for advice.

If you would like an organisation to act on your behalf to negotiate affordable payments you might want to consider a free debt management plan (DMP). This is a repayment schedule for unsecured debts.

Useful Contacts

National Debtline

On this website you can:

• Download an information pack to deal with your debt problems.

• Use the personal budget section to work out what repayments you can afford.

• Use a suite of sample letters to write to your creditors.

• Visit the debt advice section to get information that may help you deal with your debt problem.

• Access a library of factsheets.

• See if you can pay your debts via a Debt Management Plan (DMP)

The Insolvency Service

Here you can download several guides, including:

• Guide to Bankruptcy

• Fast-Track Voluntary Arrangements

• A Guide for Creditors

• A Guide for Directors

• When will my bankruptcy end

• What will happen to my home

• What will happen to my bank account

• Can my bankruptcy be cancelled

• Individual Insolvency Register

• What happens when you are interviewed by the OR

• What will happen to my pension

• Bankruptcy Restrictions Orders

• IPO / IPA (Income Payment Orders and Income Payment Agreements)

• Alternatives to Bankruptcy

Consumer Credit Counselling Service

Their help is available to anyone experiencing financial difficulties, regardless of the level of debt or financial status.

CCCS is the leading debt management charity in the UK. CCCS does not charge you for the service.