How does Bankruptcy work and is it right for me?

Firstly, what is Bankruptcy?

Bankruptcy is a very serious matter. It is important to realise that you do not have to become bankrupt just because you are in debt. There are a number of alternatives depending on the severity of your debt problem.

You can apply to your local County Court to be made Bankrupt or an unsecured creditor who is owed at least £750 can petition the Court to have you made Bankrupt.

Once a bankruptcy order has been made, it is advertised in the London Gazette and your local newspaper. The Official Receiver will also inform various organisations such as HM Revenue & Customs, the land registry, and any relevant professional bodies. Enquiries will also be made with banks, building societies, mortgage and pension companies.

Bankruptcy is a way of dealing with overwhelming debts which you cannot pay. You will have to give up all your possessions of value (there are some exceptions - see below) and your interest in your home. If you run a business it will have to be closed or someone else will have to take it over. Undischarged bankrupts cannot act as a company director or control a business by any means.

The aim of the Bankruptcy is to realise your assets and use your surplus income whilst you are in the Bankruptcy, to fairly repay as much as possible to your creditors.

Once bankrupt, your creditors have no say in how much they are paid. That is entirely up to your Trustee in Bankruptcy.

So long as you have co-operated with your trustee in bankruptcy (see below), you will be automatically discharged from bankruptcy after 12 months. Depending on the circumstances, the Official Receiver can sometimes decide to discharge you early, normally after 6 months.

When you are discharged, you are debt free.

Is Bankruptcy right for me?

There no minimum criteria but if you are applying to be made Bankrupt, the Court will want to be certain that you have taken independent qualified advice before deciding to proceed. The Judge will also want to convince himself/herself that you are not better suited to the less draconian alternatives like an IVA or a Debt Management Plan.

If one of your unsecured creditors wishes to force you into Bankruptcy, it must first get a Court Judgement directing you to pay the debt. If you fail to pay in accordance with the Court's directions and if you owe that creditor £750 or more, that creditor can apply to the Court to have you declared Bankrupt. If you fail to oppose the Bankruptcy petition or you are unable to persuade the Judge that you can pay, the Judge will approve your Bankruptcy.

How does Bankruptcy work?

From the date of your Bankruptcy Order, the Official Receiver is responsible for administering your Bankruptcy and protecting your assets. The Official Receiver also acts as the Trustee of your Bankruptcy although the Receiver may transfer this role to an Insolvency Practitioner.

On the day of your Bankruptcy you will be required to provide a detailed statement of all your assets and liabilities and provide an account of why you think your finances have developed as they have. You will then be questioned in detail about your statement.

As part of the Bankruptcy, the Official Receiver has to examine what happened in your financial affairs before your became bankrupt and determine why your debts became unmanageable. If he finds any wrong doing then he has the right and duty to take appropriate action. These investigations may involve talking to your creditors and other third parties to obtain details of any assets or liabilities that you have, or have had, an interest in either by yourself or jointly with others.

You must comply with all the Official Receiver's requests and instructions. If at any time during your Bankruptcy you fail to co-operate with the Receiver, you can be arrested.

The Official Receiver also effectively takes control of your finances whilst you are in Bankruptcy. From the date of your Bankruptcy you will not be allowed to use your bank account, building society, credit cards or other accounts and the Receiver takes control of all your assets including any property. You are not allowed to obtain any form of credit over £500 without disclosing that you are Bankrupt. Neither are you allowed to be a company director or be responsible for running a business in any capacity.

The Receiver is then at liberty to sell your assets and use that money to repay as much as possible to your creditors. This also applies to your home and any other property you have.

If your home is owned jointly, special rules apply but you effectively lose your interest in the property and eventually it has to be sold. The net proceeds are then divided between the Receiver and your co-owner. If you own your home, you are advised to discuss the situation with either your Debt Advisor or the Receiver.

Of course, any debts which are secured against your assets such as a mortgage, secured loan or Hire Purchase will be repaid out of the proceeds of the sale of those assets but any shortfalls will be added to the unsecured creditors being looked after by the Receiver.

At the same time all your creditors have to deal directly with your Trustee - that will be either the Official Receiver or an Insolvency Practitioner appointed by the Official Receiver. So you should not receive any further contacts from your creditors.

Whilst you are in Bankruptcy your Trustee can apply to the court for what is called an Income Payments Order (IPO). This order requires you to make contributions towards your Bankruptcy debts. This Order will leave you with sufficient income to meet your reasonable domestic needs of you and your family and if circumstances change, the IPO can be changed. IPO payments continue for up to 3 years from the date of the Order and could continue after you have been discharged, although this is unusual. The alternative to an IPO is an Income Payment Agreement (IPA) which has the same affect as an IPO but which is agreed between the Receiver and yourself without recourse to the Courts.

So long as you have cooperated with your Trustee and the Receiver, you will be discharged from bankruptcy after 12 months. If you have not cooperated, the receiver can go to Court to get your bankruptcy extended. Sometimes, if the Receiver believes that the circumstances behind your Bankruptcy were not your fault and he has been able to resolve your finances quickly, you can be discharged early - from 6 months onwards.

When you are discharged you are debt free except for certain prescribed debts - court fines, monies due under maintenance assessments under the Child Support Act 1991 and any student loan all remain in place and fully payable.

As we have already stated, Bankruptcy is very serious and this description is provided to help you understand some of its implications. As such this description is not exhaustive. For more details, look at our Questions and Answers about Bankruptcy or visit www.insolvency.gov.uk

 

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Warning.
Think carefully before securing other debts against your home. All loans are subject to status. By taking out a consolidation loan, the repayment period is usually extended to reduce the monthly repayments and that can increase the total cost of the loan.

Your ability to obtain credit will be affected in the short term and might be affected in the medium to long term. Fees are payable.

How does Bankruptcy work and is it right for me?