Bankruptcy 

 


 

Michael Chamberlain and Colin Savile explain the finer points of bankruptcy.

 

What is bankruptcy?

Bankruptcy is a formal insolvency procedure used to help deal with the affairs of individuals where their liabilities exceed their assets or they are unable to pay their debts as they fall due. The declaration of bankruptcy ("bankruptcy order") is made by the courts and can be obtained by any creditor (owed over £750 after the required processes have been satisfied) or by the individual concerned, applying to court.

 

A 'lighter' form of bankruptcy called a 'Debt Relief Order' is available to insolvent individuals who have less than £15,000 of debt, negligible surplus income and who do not own their own home.   

 

Who is bankruptcy for?

Bankruptcy can be the most effective option for an individual with unaffordable debts over £15,000 with few or no assets and negligible surplus income. A company director has to resign from the role when they become bankrupt. 

 

How can Chamberlain & Co help?

Chamberlain & Co can assist the debtor to complete the appropriate forms to initiate the process, provide ongoing advice during the process and after discharge. 

 

The Official Receiver is usually initially appointed as the Trustee. However, a meeting of creditors will normally be called, for the majority by value, to appoint a licensed insolvency practitioner as Trustee, who could be from Chamberlain & Co.

 

The Process

When a bankruptcy order is made, the bankrupt's affairs will be dealt with by a trustee in bankruptcy and, subject to certain exemptions, all assets will be sold to help repay creditors, as far as possible. Assets which can be retained include:

 

  • Furniture, bedding, clothing and household equipment for basic domestic needs.
  • Tools of trade.
  • Car or van of less than £2,000 value.
  • Pension.

The trustee would, therefore, seek to sell the bankrupt's home or realise their interest in it, provided its value is in excess of any mortgages and other loans secured against the property. The trustee would also seek to realise any other assets.

 

Unless the individual have previously been bankrupt, the bankruptcy will usually last no more than 12 months but the individual will be subject to a number of restrictions during this time. A bankrupt can get an early discharge. 

 

Any assets received whilst bankrupt, such as a lottery win or inheritance, will be used to help pay creditors and, any surplus income, will be required to make payments to creditors for up to 3 years from the date of the bankruptcy order.

 

Bankruptcy does nevertheless offer the opportunity of a fresh start as, it prevents creditors from making any further claims against the individual. For liabilities which arose prior to the date of the bankruptcy order. 

 

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Advantages

  • It provides a mechanism for drawing a line under historic liabilities, offering relative piece of mind and the opportunity for a fresh start. 
  • The individual will be automatically discharged from bankruptcy after no more than one year, unless they have previously been made bankrupt or have failed to cooperate with the trustee. However, in certain circumstances a bankruptcy restrictions order may be made which extends certain restrictions. 
  • All other debt recovery legal proceedings are stopped by the process. 
  • The level of any income contributions may be lower than those required in an IVA.

 

Disadvantages

  • To declare bankruptcy, the individual will be required to pay a deposit of £525 towards the costs of the Official Receiver and a court fee of £175. The individual will have to attend at court to file their own bankruptcy petition and complete a statement of affairs. Creditors can also issue bankruptcy petitions, but in these cases they will pay the deposit and court fee.
  • If the individual applies for credit of £500 or more whilst bankrupt, including  goods subject to hire purchase or conditional sale agreements, they must tell the lender of the bankruptcy. It may also be difficult to get credit after  discharge, as details of the bankruptcy will stay on the credit file for six years from the date of the bankruptcy order.
  • The individual may encounter difficulties in obtaining or retaining a bank account whilst bankrupt.
  • With some exceptions, the bankrupt will lose control of their assets as the interest in them will automatically transfer to ("vest in") their trustee in bankruptcy. This includes any interest in a property, such as the home. Any property transferred to an associated party in the five year period prior to the presentation of a bankruptcy petition, or payments made to "associates" within two years of the presentation of a bankruptcy petition, may also be recovered as an asset in the bankruptcy estate. 
  • The bankrupt must co-operate with the court, Official Receiver and the trustee in bankruptcy. In particular the bankrupt must notify the trustee within 21 days of any windfalls or increases in income, and attend any private or public examinations before the court.
  • The bankrupt may be required to make monthly contributions from any surplus income to the trustee, for the benefit of creditors, for up to 36 months from the date of the bankruptcy order.
  • The bankrupt will be automatically disqualified from acting as a company director, or directly or indirectly taking part in the promotion, formation or management of any company, except with leave of the court. Whilst bankrupt, certain professional bodies may also prevent the bankrupt from practising. The individual may not hold certain public offices or act as a trustee of a charity or pension fund.
  • If the Official Receiver believes that the bankrupt has been dishonest prior to or during bankruptcy, or that the individual is to blame for their financial position, he may apply to court for a bankruptcy restrictions order. If the court agrees, it can make an order for between 2 and 15 years, which means that the individual will continue to be subject to bankruptcy restriction.

 

Other Options Available

Individual Voluntary Arrangement (IVA)Debt Management Plan.