The following notes may be of help to anyone who is Bankrupt or contemplating Bankruptcy in understanding some of the implications of insolvency.
What is Bankruptcy?
When you are made Bankrupt it is as a result of either a Bankruptcy Order issued by the Court (on a creditor’s petition) or by the Adjudicator (on a debtor’s application).
If a creditor is owed more than £5,000. he has to convince the Court not only that the debt is due but also that you are insolvent. It is therefore somewhat more complicated than making yourself bankrupt and it will cost him around £2,000 to £3,000 or even more.
Previously all debtor’s petitions had to be submitted to the Court and looked at by a Judge. However, From 6th April 2016 if you wish to make yourself bankrupt, you will no longer need to apply to the Court. Instead you will need to complete an online application at www.gov.uk/apply-for-bankruptcy, which will be submitted to an Adjudicator. The Adjudicator is not a Judge, but is a government official whose role is to review and make decisions about individuals’ bankruptcy applications. The cost of making the application is £680 and you will have the opportunity to pay the fee online and in instalments.
When the Bankruptcy Order is made, an Estate is created and automatically, by action of law, anything that you own (with a few exceptions) no longer belongs to you but forms part of your Estate. Similarly anyone that you owe money to (with a few exceptions) can no longer claim against you but only against your Estate. The property that you can retain is your clothing, bedding, ordinary everyday household furniture, tools of your trade and a modest (i.e. less than about £1,500 in value) motor vehicle provided it is necessary for your personal use in carrying out your employment or self-employed business. Any property that you do not own personally but hold in trust for others is similarly excluded. The exceptions to the creditors include fines (because they are a punishment rather than a debt), Social Fund loans and payments due under matrimonial proceedings e.g. maintenance, alimony etc. Since 1st April 2005, lump sums under matrimonial proceedings are now claimable in Bankrupcty but the debtor will still be liable for any shortfall even after his discharge.
For Bankruptcy Orders made before 1st July 2004 money due under the student loan scheme is not excluded. For those made after 31st August 2004 all these debts will be excluded from Bankruptcy. For the period in-between only student loans under the Teaching and Higher Education Act 1998 will be provable in Bankruptcy, the mortgage style loans under the Education (Student Loans) Act 1990 will not. With effect from 12th January 2010 Student Loans are also excluded from IVAs.
The Official Receiver
The Estate in Bankruptcy is immediately under the control of the Official Receiver who is a Civil Servant employed by the Insolvency Service which is an agency of the Department for Business, Energy & Industrial Stategy (previously called the Dept. of Trade and Industry). He is also an officer of the Court. Shortly after the Bankruptcy Order is made, he will contact you either by telephone or in writing and send you a questionnaire to complete. He will make an appointment for you to attend at his office to go through the questionnaire and clarify any queries he might have. One of his main responsibilities is to establish whether there are any criminal or Bankruptcy offences that have been committed, in which case he will investigate and bring appropriate prosecutions. It is therefore very important to be completely open and honest with the Official Receiver and make a full disclosure to him. He will prepare a brief report summarising your affairs and circulate it to creditors.
If there are sufficient assets in your Estate to justify the appointment of a professional Trustee, he will take steps to arrange for the appointment of one either by calling a Creditors’ Meeting or by direct appointment from a rota. If he does not arrange for a professional Trustee, then he himself will be Trustee of your Estate. The Trustee’s job is principally to agree the creditors’ claims and to turn the assets of the Estate into cash and pay the maximum dividend possible to creditors. The Trustee has powers to go back up to five years (or longer in cases of fraud) and recover property that has been disposed of during that period, either because it has been given away, transferred or sold at less than its value or because money has been used deliberately to pay a creditor or creditors in preference to others. In this way the Trustee can increase the amount of money available to creditors.
As an undischarged Bankrupt you are subject to a number of restrictions. You cannot be a Director or take part in the management of a limited company without leave of the Court and you cannot obtain credit in excess of £500 without disclosing that you are an undischarged Bankrupt. There are many old wives tales about restrictions on operating a Bank account or on trading but these are untrue, especially after changes in law with effect from 1st October 2015. There is no legal reason why you should not have a Building Society account or Bank account or trade as a self-employed person provided of course that you can persuade a Bank or Building Society to give you an account and that you do not break the credit rule. If you do have a Bank account or trade it must however be in your own name or a name you were using at the time of the Bankruptcy.
Also, as an undischarged Bankrupt, anything that you acquire that is more than you need to live on and to support your dependants can be claimed and taken away from you. There are no hard and fast rules about how much you can earn and each person’s circumstances are considered on their own merits. The Official Receiver or Trustee will discuss with you the amount of your income and outgoings and hopefully you will be able to agree a regular monthly contribution from income. This contribution will be formalised through an Income Payments Agreement or an Order made by the Court. If you cannot agree a figure with your Trustee or the Official Receiver, he will be entitled to go to the Court and ask the Court to fix an amount. The Income Payments Agreement or Order will usually last for three years, but can be varied if, during that time, your financial circumstances change.
If you inherit any money or win on the Football Pools or Lottery or acquire any other money or property before your discharge, those funds or assets can be claimed and taken from you. You are under a duty to notify your Trustee if you should come into any money such as that. This also explains the reason for the credit restriction in that if you were to borrow say £1,000 from somebody, your Trustee could take that £1,000 as after-acquired property and you would not have the means to repay the debt.
Bankruptcy Restrictions Order
From 1st April 2004, if the Official Receiver considers that you have acted irresponsibly in the time leading up to your Bankruptcy then he will be entitled to apply to the Court for a Bankruptcy Restriction Order (BRO) against you, which, if made, will make it illegal for you to obtain credit in excess of £500 without disclosing the Order, or be a Company Director for between 2 and 15 years depending on the seriousness of the complaint.
If you own your home and somebody else has an interest in it, then the Trustee is not entitled to obtain a Possession Order for a period of twelve months after his appointment. After twelve months he is entitled as of right to a Possession Order unless there are very exceptional circumstances. The purpose of this delay is to give the Trustee an opportunity to negotiate a sale of his interest in the property to the joint owner or alternatively to give time for you and the joint owner to co-operate with an orderly sale of the property in order to maximise the amount that will be payable to the joint owner in respect of his or her share, as well as to the Estate. This twelve month rule does not apply to any mortgagees who can apply immediately for possession if your mortgage is in arrears.
If he has not sold his interest or otherwise dealt with it by, say, starting legal action, within three years of the Bankruptcy Order or 1st April 2007, whichever is the later, then the property will revert back to you. Please note that this re-vesting rule only applies to your home, your spouse’s home or a former spouse’s home provided that person was living there at the time of the Bankruptcy Order. It does not apply to any other asset or property. Spouse means spouse and does not include partners or common-law husbands or wives.
If the Trustee’s interest in the property is worth less than £1,000 then he will not be able to enforce a sale.
If you have a personal retirement pension policy then this will only be treated as an asset of the Estate in Bankruptcy if the bankruptcy order was made on a petition presented before 30th May 2000. Similarly, part of an occupational pension might be claimable in certain circumstances. If you are entitled to an occupational pension in respect of a former employment, then this will remain your property. During the period until your discharge, however, any money that you receive under either sort of pension will be treated as income for the purposes of calculating any income payments that you must make.
If, during the period before your discharge therefore, you draw down money from your pension it will be treated as income and can be claimed from you by your Trustee. The Trustee cannot however force you to draw down if you don’t do it voluntarily.
The Estate in Bankruptcy stays open forever (or until every last penny is paid including interest and costs) and it will remain permanently on record. There may be public notices in your local newspaper advertising the Bankruptcy and it will be published in the London Gazette. Until three months after your discharge the details will be kept on an Individual Insolvency Register which will be open to inspection by the public. Consequently it will be picked up by all the major credit agencies and to that extent, even after your discharge, the Bankruptcy will tend to be a black mark on your record and may create difficulties for you for years to come.
Unless the Official Receiver or Trustee makes an application to the Court to extend the period, which he will do if he is satisfied that you have not been fully co-operative, you will be automatically discharged from the restrictions and the requirement to pay over after-acquired property on the first anniversary of the making of the Bankruptcy Order.
You will not be notified that you have been discharged but, if you need proof that you have, you can get a certificate of discharge from the Court on payment of a fee.
The discharge does not mean that you get your assets back. For that you need to get the bankruptcy annulled.
If you have enough assets in your Estate to pay all the costs and claims in full with interest then you can apply to the Court to have the Bankruptcy annulled. This means that legally it is as if it never happened and it will be wiped off the record. You can sometimes save a lot of costs if you can arrange for someone else to provide the money to pay everything because if the funds do not come from your assets the Department of Trade will not charge their fees and you may, under certain circumstances, be able to reduce the amount of interest which needs to be paid. If you think that this is a possibility you should discuss it with your Trustee because, by working with him, you may also be able to save some of his charges as well.
Alternative to Bankruptcy – Voluntary Arrangement
The costs of Bankruptcy are quite high. In addition to the Petition costs (where a creditor petitions) which are repayable to the creditor, the Official Receiver will charge £1,990 if it is a debtor’s application or £2,775 on a creditor’s petition (with effect from 21st July 2016) together with a flat fee of £6,000 for various fees and expenses. These costs are over and above the Trustee’s costs of administering the Estate. The amount of dividend which the creditors will receive in cases of Bankruptcy is therefore much reduced. In many cases therefore, creditors are often prepared to consider an Individual Voluntary Arrangement as an alternative to Bankruptcy as many of these costs can thereby be avoided. A Voluntary Arrangement can be entered into even after a Bankruptcy Order has been made, in which case the Bankruptcy will be annulled which means that legally it never happened.
Changes to the Law
The Bankruptcy laws are constantly under review by successive governments. The notes above reflect the law relating to people who go Bankrupt now, under the existing legislation. There have been some radical changes to Bankruptcy law which came out on 1st April 2004 as a result of the Enterprise Act 2002. If you were made Bankrupt before that date then some of the above comments may not apply to you.
If you are in any doubt then please do not hesitate to contact us for clarification.