Bankruptcy is an option that often has to be considered when an individual cannot pay their debts as they fall due. A first time bankrupt with debts will generally receive their discharge one year after the date of the bankruptcy order (there is the possibility that in some cases the bankruptcy discharge period will be less than one year).
Although bankruptcy has a bad stigma and is publicly advertised, it should always be considered when dealing with individual insolvency cases.
Please note that if your are ever faced with the prospect of bankruptcy you should look at alternatives as soon as possible such as the Individual Voluntary Arrangement procedure (IVA). Bankruptcy is generally considered to be an option of last resort for most people.
Bankruptcy is one way of dealing with debts you cannot pay.
The bankruptcy proceedings:-
1. Free you from overwhelming debts so you can make a fresh start, subject to some restrictions.
2. Make sure your assets are shared out fairly among your creditors.
Anyone can go bankrupt, including individual members of a partnership. There are different insolvency procedures for dealing with companies and for partnerships themselves.
How are you made bankrupt?
An individual can be made bankrupt either in one of three ways:
Voluntarily - By the debtor themselves.
Involuntarily - By the creditor owed money (£750 Minimum).
The supervisor or anyone bound by an IVA
A bankruptcy order can still be made even if you refuse to acknowledge the proceedings or refuse to agree to them. You should therefore co-operate fully once the bankruptcy proceedings have begun. If you dispute the creditor’s claim, you should try and reach a settlement before the bankruptcy petition is due to be heard. Trying to do so after the bankruptcy order is made is both difficult and expensive.
What are the implications of bankruptcy?
You lose control of your assets.
You cannot obtain credit for over £250 without the permission from the lender.
You cannot act as a company director.
You cannot take any part in the promotion, formation or management of a limited company (LTD) without the permission of the court.
You cannot trade in any business under any other name unless you inform all persons concerned of the bankruptcy.
You may not practice as a Charted Accountant / Lawyer.
You may not act as a Justice of the peace (JP).
You may not become a member of parliament.
You may not become a member of the local authority.
Your credit is affected for many years after the annulment.
You may be publicly examined in court.
What are the advantages of bankruptcy?
For the person involved, bankruptcy provides relative peace of mind and possible automatic discharge after one year (or less in some cases).
For the creditors, bankruptcy allows a full investigation of the debtor's affairs to be carried out.
Bankruptcy is a very serious matter. Declaring yourself bankrupt can have disastrous long-term implications.
If you are declared bankrupt you can expect to: -
Have your situation advertised in the local press and the London Gazette for all to see.
Be required to fill in numerous forms and have an extended meeting with the Official Receiver, and, if appointed, a Trustee in Bankruptcy who will thoroughly investigate your affairs.
Have any business you own immediately closed and any employees dismissed.
Lose any assets of real value including your home, life insurance and possibly pensions
Lose any assets you may acquire during the term of your bankruptcy such as inheritances, insurance settlements, growth of asset value in your home.
Have your building society, creditors, landlord etc immediately informed.
Have all bank accounts, credit cards etc closed. Anything you might be leasing, or buying on hire purchase, such as your car will be immediately returned to the owner.
Lose professional and business status, have some employment opportunities prejudiced, face rejection from many associations and societies.
The effects of bankruptcy
Once you have been made bankrupt all assets belonging to you come under the control of the Trustee, including your home. If you live with a partner and/or children then a period of twelve months may be allowed for other living arrangements to be made. At the end of the twelve-month period, the property will almost certainly have to be put up for sale, enforced by a Court order if necessary. If you own the property with someone else they may be able to make an offer to buy out your interest in the property from the Official Receiver.
The other main disadvantages of bankruptcy are the restrictions placed upon you and the stigma of having to declare oneself as a bankrupt for certain transactions.
A bankrupt may not:
Obtain credit of £250 or more alone or jointly with another person without disclosing his or her bankruptcy
Conduct business directly or indirectly in any name other than that in which he or she was made bankrupt
Be involved directly or indirectly in promoting, forming or managing a company without the Court’s permission
Hold certain public offices
When a bankrupt is discharged these constraints are ended.
A bankrupt may open a new bank or building society account but should disclose the fact that they are bankrupt. The bank or building society may then impose conditions and limitations. Overdraft facilities or chequebooks must not be obtained, as they are likely to be dishonoured. The bankrupt must inform the Trustee of any funds available in the account, which exceed the normal living expenses, in order for the Trustee to distribute among the creditors.
What can I keep if I'm bankrupt?
You can keep any tools, books, vehicles (if low value) and other items of equipment needed personally in your employment or business. You will also be able to keep your clothing, bedding, furniture and basic household items.
Which is the best option for you: Bankruptcy or an IVA (Individual Voluntary Arrangement)?
Below we highlight the many drawbacks of using the IVA procedure and Bankruptcy.
The procedure you choose will be based on your particular situation. When choosing between Bankruptcy or IVA you will need to examine the advantages and disadvantages of each procedure carefully.
If a person is long term unemployed, retired or on long term incapacity benefit then choosing bankruptcy may be your best option. To file bankruptcy there is a lot of paperwork to complete and there is a court filing fee to pay. Even though the bankruptcy process is long winded it does provide the person with a fresh start.
If, however, the person is in regular employment and wants to avoid the pitfalls of bankruptcy then it will be worth considering an IVA.
The main advantages and disadvantages of bankruptcy and the issues faced when dealing with banktruptcy are :-
1. The bankruptcy can literally get rid of all your debts immediately upon the bankruptcy order being made.
2. When the bankruptcy is finalised you are free from any responsibility from the debts.
3. If you are earning a good salary then the trustee may ask you for some money each month. This is called an income payments order.
4. The trustee may not take any 'after acquired' assets from you, that is, after the bankruptcy order is made.
5. If you inherit money whist you are under a bankruptcy order you may have to pay your debts back.
6. During the course of the bankruptcy, if you win the lottery of come into some money then under the terms of the bankruptcy you may have to pay your debts back either partly of in full.
7. To file bankruptcy you must owe over £750.
8. If you decide that you want to make yourself bankrupt then it is very easy to file bankruptcy. All you have to do is complete some forms and pay the bankruptcy filing fee.
9. The bankruptcy period will be one year under current bankruptcy legislation.
10. A bankruptcy Order will not effect any secured lending such as mortgages or secured loans
11. A bankruptcy Order will not affect any car finance or hire purchase contracts.
12. If you have bankruptcy order on you credit file this will effect your ability to get credit for up to 6 years.
13. Your pension rights can be affected in bankruptcy.
14. Bankruptcy can be very distressing especially if you have been involved in gambling or reckless spending patterns.
15. After a bankruptcy order is made you will have to meet with a government official called the Official Receiver.
16. The debtor has a pension policy, it is vitally important that he seeks professional advice of either an IP or a bankruptcy lawyer prior to petitioning for his own bankruptcy.
17. If you are a home owner then the Trustee in bankruptcy will want you to either sell or refinance your property to release the equity.
18. There are various criminal offences in bankruptcy which may be triable on indictment by judge and jury in the Crown Court. These are:
o Failing to disclose property or disposals to Official Receiver or trustee
o Bankrupt removing property that he is required to deliver to Official Receiver or trustee
o Bankrupt failing to deliver books and records to the Official Receiver or trustee
o Bankrupt disposing of, or altering, books or records relating to his estate or affairs
o Bankrupt making material omission in statement of his affairs
o Bankrupt making false statement, or failing to inform trustee, where false debt proved
o Bankrupt fraudulently disposing of property
o Bankrupt absconding with property he is required to deliver to Official Receiver or trustee
o Bankrupt disposing of property obtained on credit and not paid for
o Obtaining property in respect of which money is owed by a bankrupt
o Bankrupt obtaining credit or engaging in business without disclosing status or name in which he was made bankrupt
Bankruptcy vs. IVA ?
1. Under the terms of an IVA you may have to release equity from all your property.
2. You have an average of five years to pay back as much as you can afford.
3. Under an IVA you can negotiate with your creditors.
4. Upon the IVA being made you have protection from the court from any further creditor action.
5. With regards to joint debts, under the terms of an IVA, it will usually mean liability is removed
6. The costs of an IVA are lower than Bankruptcy.
7. It costs around £500 to file a Bankruptcy Order. There should be no upfront fees with an IVA.
8. There are various statutory costs with a bankruptcy case but there are none with an IVA.
9. A person who is under a Bankruptcy Order may still apply for an IVA.