Bankruptcy is an insolvency process which allows you to be discharged from the majority of your unsecured debts after a period of 12 months in most cases. There are some debts, such as student loans, which will survive Bankruptcy however.
Bankruptcy can be entered into in one of two ways:
- An application to the Insolvency Service to make yourself bankrupt.
- By the court following a petition presented by a creditor.
Making yourself bankrupt
Under recent changes to legislation an individual can now apply to the Insolvency Service, also known as the Official Receiver, for their bankruptcy rather than to the court. To be able to declare yourself bankrupt you must be insolvent, the definition of which is:
- Your liabilities outweigh the balance of your assets
- You cannot pay your debts as and when they fall due
- A formal demand for repayment has been outstanding for more than 21 days
- A judgement / warrant of execution has been returned either wholly or partially unsettled
The application to the Insolvency Service is a relatively straightforward online process but it attracts a fee of £680. You SHOULD NOT submit the application until you have sought advice / researched the consequences of bankruptcy (see below). You should always consider what other options are available to you, for example, an Individual Voluntary Arrangement or Debt Relief Order may be more suitable, options we can discuss with you in more detail.
Creditor petition
What happens if a creditor starts the process?
If you are unable to pay your debts as they fall due, creditors are likely to make informal demands by way of telephone, email and/or letter. Where that creditor is owed more than £5,000, they can apply to court for a Bankruptcy Order against you.
A precursor to this will be a document known as a statutory demand. A statutory demand is a formal claim, usually served on you in person, or via your letter box where you are not available. On receipt of the demand you will have just 21 days to settle the debt in full. If you fail to do so then you are deemed to be insolvent and the creditor can then present a petition for your bankruptcy.
Once presented to court, the petition will be sealed and a date and time set for the hearing. The petition should again be personally served upon you, or where you do not make yourself available for service, via your post box. If you fail to attend the hearing to make representations to the judge, it is likely that the order will be made against you.
If you have been served with either a statutory demand or a Bankruptcy petition and you would like to discuss your options with an Insolvency Practitioner, please contact us on 0330 159 8080 for a free and confidential meeting.
What are the consequences of Bankruptcy?
On the making of a Bankruptcy Order, the Official Receiver is appointed as Trustee of your estate. Assets that belong to you at the date of your Bankruptcy, including the interest in your home vest in the Trustee for the benefit of your creditors, without any need for conveyance or transfer. The Trustee effectively steps into your shoes and takes control of your assets.
Here are some of the most common assets which will vest in your Trustee for the benefit of your creditors:
- Your share of the equity in your matrimonial home
- Your share of the equity in any other property
- Motor vehicles (above a certain value)
- Savings
- Life Policies
- Surplus income after the reasonable domestic needs of you and your family have been met
The Insolvency Service has published a number of guides about what will happen to your assets in bankruptcy, which can be located here.
In addition to the vesting of your property there is cost implication. The Official Receiver will charge an administration fee of £2,775 and a general fee of £6,000. If a Trustee outside of the Insolvency Service is appointed then they will charge fees in addition to this, usually on a time costs basis. This means that at least £8,775 is added to the amount of debt owed by you. Therefore, if your assets are sufficient to pay your debts in full, bankruptcy will result in a greater proportion of your assets being sold in order to repay the costs of your bankruptcy. This is why you should not ignore a petition for Bankruptcy.
Set out below are some of the advantages and disadvantages of Bankruptcy:
Advantages
- You can start a-fresh once your assets have been dealt with
- Pressure is taken off you because you no longer need to deal with your creditors
- Household items such as clothes, beds, furniture etc. do no vest in the estate (unless they are of a significantly high value such as antiques)
- Creditors have to cease legal action (unless it is being taken by a secured creditor)
- The money owed by you is usually written off
Disadvantages
- You will need to find £680 to make yourself bankrupt
- If your income is sufficient you may be ordered to pay over a certain percentage for a period of three years
- Your credit rating will be effected and the bankruptcy will remain on record for a period of at least six years
- If you own your own home, it may be sold, either voluntarily or under possession proceedings
- Some of your other possessions might have to be sold, for example, your car or other luxury items you may have
- Some professions do not allow someone who is bankrupt to continue working for them
- If you own a business that may also be affected as you are unable to act as a Director of a company whilst bankrupt
- Your affairs will be investigated and if it appears that there has been any dishonesty on your part, for example, you have defrauded your creditors or transferred your assets to another party, the bankruptcy may be extended for a period of up to 15 years
Bankruptcy might not be your only option and it might not be the best option for you. Another option may be an Individual Voluntary Arrangement which may be a cheaper alternative to bankruptcy. contact us on 0330 159 8080 now to discuss what is best for you.