What is bankruptcy?
Bankruptcy is an insolvency procedure in which an individual enters when one cannot pay their creditors.
The bankruptcy proceedings free the individual from overwhelming debts so that they can make a fresh start, subject to certain restrictions and make sure their assets are shared out fairly amongst their creditors.
Anyone can be made bankrupt, including individual members of a partnership.
There are different procedures for dealing with Companies and for partnerships themselves.
How is one made bankrupt?
A Court makes a Bankruptcy Order only after a bankruptcy petition has been presented.
A petition is usually presented either:
- By the debtor himself
- By one or more of his creditors who are owed at least £750 and that amount is unsecured.
In many instances a Statutory Demand will be issued prior to the presentation of a petition and the debtor will have 21 days in which to respond, ie pay or dispute the amount. If no dispute is made, then a petition will be presented for the person’s bankruptcy.
If the creditors claim is disputed, then the debtor should try and reach a settlement before the bankruptcy petition is heard or apply to the Court to have it dismissed.
Where is the bankruptcy order made?
Bankruptcy petitions are usually presented either at the High Court in London or a County Court near where the debtor lives.
A petition can be presented against anyone, even if they are not present in England or Wales at the time of presentation of the petition. This can happen when the debtor normally lives in or within the previous three years has had residential or business connection within England and Wales. Also if the debtor owes money or income tax for any business they have carried on in England and Wales before leaving the Country.
Most Government Departments commence bankruptcy proceedings in the High Court of London. If the debtor does not trade or live in the London area, the case will usually be transferred to the appropriate local Court and dealt with by the local Official Receiver.
Once a Bankruptcy Order has been made, it is advertised in “The London Gazette” and in a local or national newspaper.
Who will deal with the bankrupt’s case?
a. The Official Receiver
The Official Receiver is a Civil Servant in the Insolvency Service and an Officer of the Court. The Official Receiver has the responsibility of administering the bankruptcy and protecting the bankrupt’s assets from the date of the Bankruptcy Order and will act as Trustee of the Estate unless an Insolvency Practitioner is appointed.
The Official Receiver is also responsible for looking into the bankrupt’s financial affairs for the period before and during their bankruptcy. The Official Receiver will report to the Court and to the creditors. Also there will be a need to report any matters which indicate that the debtor may have committed criminal offences in connection with their bankruptcy.
b) An Insolvency Practitioner
An Insolvency Practitioner is a person who is qualified and authorised to act as same. They can be appointed Trustee instead of the Official Receiver and they will then be responsible for disposing of the debtors assets and making payment to the creditors. The Insolvency Practitioner will also carry out the duties of the Official Receiver as mentioned above.
What are the duties of a bankrupt?When a Bankruptcy Order has been made, the debtor must go to the office of the Official Receiver and provide information about their financial affairs. Nowadays the Official Receiver conducts a number of interviews by telephone rather than face to face.
Usually, before the interview, the bankrupt will be sent or given a questionnaire for completion to fully document assets and liabilities of the bankrupt.
The bankrupt will also be required to hand over the books and records, bank statements etc to the Trustee in Bankruptcy and any insurance policies and other papers relating to their financial affairs.
The bankrupt has a duty to report to the Trustee details of all the assets and increases in income that he obtains during his bankruptcy. This also includes such property as lump sum cash payments that may be received from redundancy payments or money left is a will.
Once adjudicated bankrupt, the bankrupt must immediately cease using bank or Building Society or credit cards or similar accounts straight away and will not be allowed to obtain credit of more than £250 without first disclosing the fact that they are bankrupt.
If the bankrupt does not assist the Trustee in every way, the Trustee can apply to the Court to have him arrested.
How will bankruptcy affect the debtor?
1. In Relation To His Creditors
Once made bankrupt, they must not make any payments direct to their creditors, as the creditors need to lodge a claim with the Trustee.
There are some very limited exceptions to this, the main ones being:
- Creditors who have a mortgage or charge on the house, if mortgage payments are not made, the lender may apply to have the property repossessed and then sell the home.
- Court fines and other obligations arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991.
- Student Loans
Obviously certain payments are still made by the bankrupt from the date of his bankruptcy such as rent, electricity, gas etc and these are basically the essentials required to live.
2. The Bankrupt’s Assets
The assets of the bankrupt rest and come under the control of the Trustee in Bankruptcy. If the bankrupt has a business, this will normally be closed and the employees dismissed or the Trustee may obtain authority to trade the business until it is sold.
The bankrupt can keep the following items, unless their individual value is more than the cost of a reasonable replacement:
- Tools, books, vehicles and other items of equipment which are needed to use personally in employment, business or vocation.
- Clothing, bedding, furniture, household equipment and other basic items that arc needed by the bankrupt and his family in the home.
The above items must be disclosed to the Official Receiver/Trustee who will then decide whether the bankrupt can keep them.
All other assets will be disposed of by the Trustee in Bankruptcy in order to pay the fees, costs and expenses of the bankruptcy and make a distribution to the creditors.
The trustee can look at transactions made in the last two years to establish whether any transfers were carried out at an undervalue and try to restore same and will look at any transactions over a five year period that have been entered into with connected parties.
The Trustee may also ask the Court to make an Order that the bankrupt has to pay part of his wages or salary if the income is more than needed to live on.
3. Pension Scheme
The effect of the bankruptcy on the Pension Scheme rights will depend on a number of factors. These include whether or not the bankrupt is a member of an Occupational Pension Scheme or have a personal pension.
In a recent case it was decided that the Trustee in Bankruptcy had the right to “cash-in” Pension Schemes, whereas prior to this case, it was generally believed that a Trustee in Bankruptcy had no right whatsoever over Pension Schemes.
4. Life Assurance Policies
The Trustee will be able to claim any interest held in a life assurance policy. The Trustee is entitled to sell or surrender the policy and collect any proceeds on behalf of creditors. Where the life assurance policy has been charged to any person, eg an endowment policy used as security for the mortgage on the home, the rights of the secured creditor will not be affected by the making of a Bankruptcy Order. Consequently, the Trustee would not be able to surrender same.
What happens to the home?
This is the most asked question by any individual who seeks advice as to whether they should go into bankruptcy or consider a Voluntary Arrangement.
The bankrupt’s interest in the home, whether Freehold or Leasehold, solely or jointly, mortgaged or otherwise, will form part of their Estate, which will be dealt with by the Trustee. The home may have to be sold to go towards paying creditors.
If the husband, wife or children are living with the bankrupt, it may be possible for the sale to be put off until the end of the first year of bankruptcy. This gives time for other housing arrangements to be made.
The husband, wife, partner, a relative or friend, may be able to buy the bankrupt’s interest in the home. This may be so even if that interest is very small, worth nothing or in a negative situation. Such a disposal would prevent a sale by the Trustee at a future date. The spouse or any other interested party should be encouraged to take legal advice about the home as soon as possible.
One of the reasons why it is important that the transaction relating to the property is dealt with immediately, especially where there is negative equity, as if one waits until near the end of the bankruptcy to deal with this matter, then it is possible that, with property values increasing, the bankrupt’s share of the equity could rise substantially.
If no one buys the Bankrupt’s interest within 12 months the Trustee will make an application to court for repossession and sale of same. He will not do this if the equity is less than £10,000. If the Trustee is unable to sell the home, he may obtain a Charging Order on the interest, which must be paid from the bankrupt’s share of the proceeds when the property is eventually sold, even if the home is sold some time after the bankrupt’s discharge.
Since the Enterprise Act which came into force in April 2003 the Trustee must sell the House within 3 years otherwise the interest in the house reverts to the bankrupt. This does not apply to other property owned by the bankrupt.
What are the restrictions on a bankrupt?
The Enterprise Act introduced The Bankruptcy Restriction Order. A Bankruptcy Restriction Order will last for a minimum of 2 and a maximum of 15 years. A person subject to such an order may not:
- Obtain credit of £250 or more either alone or with another person without disclosing the fact that he is subject to such Order.
- Engage in any business under a name other than that in which he was adjudged bankrupt without disclosing that he is subject to such an order.
- Act as a director of a limited company or take part in its management.
- Act as receiver or manager of a company on behalf of a debenture holder.
- Act as an insolvency practitioner.
- Will be disqualified from sitting as a Member of the House of Commons or sitting or voting in the House of Lords or any committee of the House of Lords.
Additionally, because of the bankruptcy, if they are professionals they will loose their Licence during the period of their bankruptcy but may reapply once discharged from bankruptcy.
The Secretary of State or the Official Receiver may apply to the Court for a Bankruptcy Restrictions Order. In considering whether to make the Order the court must take into account the conduct of the bankrupt including:
- The failure to keep or produce records
- Giving a preference or entering into a transaction at an undervalue
- Failure to supply goods or services paid for in advance
- Trading at a time when the bankrupt knew, or ought to have known, that he was unable to pay his debts
- Incurring a debt which the bankrupt had no reasonable expectation of being able to pay
- Failure to account for loss of property
- Gambling, and rash and hazardous speculation
- Neglect of business affairs of a kind which may have materially contributed to or increased the extent of the bankruptcy
- Fraud or fraudulent breach of trust
- Failure to cooperate with the Official receiver or Trustee.
An application must be made within one year or the permission of the Court will be required to make a late application.
A bankrupt may offer a bankruptcy restriction undertaking which will have the same effect.
Becoming free from Bankruptcy
Generally a bankrupt will automatically be freed from bankruptcy (known as “discharge”) after one year unless an application is made by the Official Receiver for the postponement of the discharge due to the lack of co-operation of the bankrupt..
One can also become free from bankruptcy if an application is made to Court for the Annulment of the Bankruptcy Order. This would normally be where the debts, fees and expenses of the bankruptcy proceedings have been paid in full or the bankrupt has entered into a Voluntary Arrangement.
If the bankrupt has not carried out his duties under the bankruptcy proceedings, the Official Receiver/Trustee may apply to the Court for this discharge to be postponed until such time as full compliance is carried out.
Once a bankrupt has been discharged, he must ensure that all future liabilities are paid as and when they become due and payable, as this could result in a further Bankruptcy Order being issued against them and the whole procedure commences once again.
Alternatives to Bankruptcy
There are alternatives to bankruptcy and the main procedure used is known as an “Individual Voluntary Arrangement”, which will negate bankruptcy proceedings.
As stated above, one can still enter into a Voluntary Arrangement once they have been declared bankrupt and then apply for the Bankruptcy Order to be annulled.
Where to go for help and advice
Any person who is unable to meet their liabilities as and when they become due and payable should immediately seek advice from a licensed Insolvency Practitioner or a person who is duly qualified and able to give proper advice.
It is imperative that this advice is taken sooner rather than later, as it is always easier to reconstruct and rescue a business and avoids bankruptcy from the outset, rather than it is when it’s “knocking at death’s door”.
Costs of Banruptcy
As with compulsory Liquidations the Secretary of State charges Ad Valorem Fees as Follows:
Charge on the first £2,000.
Charge on the next £1,700.
Charge on the next £1,500.
Charge on the next £396,000.
Charge on the Balance until total of £80,000 taken in fees.