What is Bankruptcy?
Bankruptcy is one way of dealing with debts you cannot pay, so that you can make a fresh start. But, depending on your particular situation it might not be your best option, so you should always consider all the other potential processes available to you.
Any individual can go bankrupt, including a Sole Trader, an individual member of a Partnership, or a Company Director who has given a “Personal Guarantee” to their suppliers or bankers.
Bankruptcy can be sought, either voluntarily or involuntarily. Voluntarily by the debtor themselves, who have to fill in some forms/questionnaires and take them to their local County Court and pay the bankruptcy filing fee which as of March 2011 is £600.00 per person, or partnership.( some of the court costs can be claimed back by a person filing who is on certain defined benefits).. Involuntarily by the creditor owed money (the debt minimum is £750.00) please note that you can still be made bankrupt by a creditor, even if you refuse to acknowledge the proceedings.
A Bankrupt cannot practice as a Chartered Accountant or a Lawyer, act as a Justice of the Peace (JP) become a Member of Parliament (MP) or a member of a Local Authority or act as a Trustee of a charity or a pension fund. Anyone employed, considering or being threatened with bankruptcy, should carefully check their “Terms & Conditions” of Employment for any restrictions that would/might affect their job.
Filing for Bankruptcy voluntarily is a simple matter and a first time Bankrupt will generally be “discharged” one year after the date of the order. (Sometimes the discharge period can be less than one year) Fewer stigmas are attached to bankruptcy today, but as with all insolvency processes the consequences need to be fully understood before making a decision.
Positives of the Bankruptcy Process
- You can literally get rid of all your unsecured debts immediately the order is made. This does not include secured debts like mortgages or any creditor already holding a “charge” on your home. Any existing court fines, family maintenance orders, benefit overpayments and student loans are also excluded.
- A bankruptcy order will not affect any car finance or hire purchase contracts and it is normal to expect the finance company to seize back the products concerned.
- “After acquired” assets (acquired after discharge) cannot be taken from you.
- There is no restriction on the amount you can earn, although you may be asked for some money each month if your income is higher than your reasonable living costs.(this is called an income payment order) The “Trustee” responsible for managing your bankruptcy wants you to work and if possible contribute towards your creditors.
- You can operate a new bank account, but on bankruptcy you must advise and stop using your existing bank/building society, credit cards straightaway. Most banks will provide a basic service for bankrupts. Do not make direct payments to any creditors affected by your bankruptcy order.
Negatives of Bankruptcy
- Bankruptcy is advertised and normally lasts 12 months, but remains on your credit file for 6 years affecting your ability to get credit.
- A Bankrupt cannot apply for credit in excess of £500.00 without notifying the lender of the bankruptcy.
- A Bankrupt cannot carry on a business (directly or indirectly) in a different name from that in which you were made bankrupt without telling all those you do business with the name in which you were made bankrupt.
- A Bankrupt cannot be concerned (directly or indirectly) in promoting, forming or managing a limited company, or act as a company director, without the court’s permission.
- An Official Receiver or an Insolvency Practitioner will be appointed “Trustee” to manage your bankruptcy. He/she will want to interview you, to understand why you got into debt and to explain in detail the full process. They will take control of all your assets other than those you need to live (including your family) and work.
- If you own your home, freehold or leasehold, solely or jointly, mortgaged or not, your interest in the home (50% if married/partnered) will form part of your estate and may have to be sold to pay your debts. For a family this normally will not happen for a year to give time for other housing arrangements to be made. Your wife, husband, partner, relative, friend may be able to purchase your interest in the home from the Trustee. Such a purchase would prevent a sale of the property by the Trustee at a later date.
- The Trustee can claim any interest held in a life assurance policy, less 50% if the policy is in joint names. Any pension income will be included.
- The Trustee may apply to court for an IPO (an Income Payments Order) but only if your income is in excess to your “reasonable” family living expenses. An IPO or an IPA (an Income Arrangement Order) can last for up to 3 years.
- Bankruptcy Restrictions Orders can be introduced if your Trustee decides that you have been dishonest either before or during bankruptcy. The court can make such an order, which last for 2-15 years and you will continue to be subject to the restrictions of bankruptcy.
What Is Insolvency?
Put simply, Insolvency means you cannot pay your debts when they fall due and/or you owe more than you own. If that applies to you, you probably also are experiencing creditor pressure including legal threats or action. You should take advice, (which should be free) to understand your options and plan accordingly.
An Iva or Bankruptcy
Which is the best option for you? An IVA (Individual Voluntary Arrangement) or a Bankruptcy?
When dealing with “Individual” insolvency cases, an IVA or Bankruptcy should always be considered, along with other processes that might be appropriate, depending on particular circumstances. For simplicity and ease of comparison, both legal processes are examined here.
Debt Relief Order
A Debt Relief Order (Dro) was introduced in April 2009 especially for people with total debts, which they can’t pay, of less than £15,000.00. To apply, your total assets, excluding a car, cannot exceed £300.00 and your disposable income, after living expenses, must be less than £50.00 a month. The filing fee is currently less than £100.00 and applicants must have been living/working in England and Wales for the last 3 years, not used a DRO within the last 6 years and not be involved in any other formal insolvency processes at the time of application.
Other Alternative Processes.
Debt Management or Debt Consolidation schemes have a place, but tend to be very expensive, with high set up costs and a higher percentage of the monthly payments going to the management company and not the creditors. These schemes are not legally binding and any creditor can take action at any time against you.
Informal Arrangements are worth considering, where a professional negotiates on your behalf to set up payment plans, payment holidays and settlements. Again these are informal arrangements and not legally binding. (unless willingly agreed by both parties)
Where to Go for Help and Advice.
There are 100′s of websites/companies offering debt advice and solutions-just choose wisely. The following reputable organisations provide free advice and are worth contacting.
Business Debtline is a charity that provides free telephone help for the self-employed and small businesses facing financial difficulties. Helpline on 0800 197 6026. Web is www.bdl.org.uk
Citizens Advice (CAB) is a charity that offers free, independent and confidential advice from more than 700 offices throughout the UK. Helpline on 0207 833 2181. Web is www.adviceguide.org.uk
Consumer Credit Counselling Service (CCCS) is a charity providing free counselling and money-management help to families and individuals. Helpline on 0800 138 1111. Web is www.cccs.co.uk
The Insolvency Service is a Government agency that covers all insolvency matters and provides excellent advice on the telephone 0845 602 9848, or via their website at www.insolvency.gov.uk
National Debtline offers free, independent and confidential advice over the telephone. Helpline is 0808 808 4000. Web is www.nationaldebtline.co.uk
Phoenix & Co offer free, independent advice to local South West businesses. Licensed Recovery & Insolvency Practitioners. Telephone 01392 314092. Web is www.phoenixing.co.uk
Rescue. Recover. Renew. For free advice: