Bankruptcy

What is bankruptcy?

A bankruptcy order may be obtained by any creditor owed more than £750, or you yourself may ask the court to make an order. In either case, the Official Receiver, a government official, will then contact you for details of your financial position. Subject to certain exemptions, bankruptcy means that your assets are sold and the money is used to pay your creditors as much as possible. The assets will be sold by the Official Receiver or an IP, as your ‘trustee in bankruptcy’. Assets you will be allowed to keep include:

• ordinary household contents;
• a modest motor vehicle;
• the benefit of a residential tenancy;
• ‘tools of trade’ – things you need to pursue your trade or vocation;
• any money you have in a pension fund. However, you should seek advice if the fund is large or if you are likely to be able to take the benefits of the fund in the next few years.

There are special bankruptcy rules regarding your home. Generally speaking, if you have equity in a house (i.e. it has a value in excess of any mortgages on the property), even if it is jointly owned, it may have to be sold. However, the trustee will be happy to discuss how to avoid a forced sale of the property, for example by selling your share to any joint owner or a friend or relative. The bankruptcy law encourages a trustee not to take any steps to force a sale through the court during the first 12 months of the bankruptcy, so you have a reasonable time to make any necessary arrangements. In addition, the trustee has three years from the date of the bankruptcy order to sell your house or otherwise deal with your interest in it. If he does not do so within that time, the property will revert to you. And if the value of your equity is less than £1,000 the trustee will not be able to sell it at all.

Bankruptcy Information UK

If you own a house with little equity, you or any joint owner should consider seeking to buy out your share of the house from the bankruptcy as soon as possible. Otherwise, movements in property prices (or mortgage repayments) could produce an increased equity later – even after your discharge from bankruptcy – and the trustee could then seek full value for your interest. In most cases the cost of buying your share should be no more than the trustee’s valuation and conveyancing fees.

If you have surplus income above the needs of yourself and your dependants, you will be expected to make contributions to your creditors for up to three years, and may be ordered to do so by the court. If you come into any money during the bankruptcy, such as an inheritance or a lottery win, that too will be available to your creditors.

In most cases the bankruptcy ends after one year or even sooner if the Official Receiver decides to close his file early. The slate is then wiped clean and your creditors can make no further claims against you. There are some exceptions. For example, you may still have to pay any lump sum order made against you in divorce proceedings and any unpaid court fines. Even if some of your assets remain unsold after the end of your bankruptcy, they will still remain available to your creditors and your trustee can still sell them. The existence of the bankruptcy will also remain on record, e.g. at the Land Registry and with credit reference agencies.

Bankruptcy has different consequences for different people. A professionally qualified person such as a solicitor or accountant may have his practising certificate suspended because of his bankruptcy, and a bankrupt cannot act as a company director. People in such a position are much more likely to seek an IVA. However, in other cases an IVA may have fewer advantages and bankruptcy might be a better option for you. You should explore openly with your IP what is the right thing to do in your case. Remember he can only advise you properly if he knows all the facts.

You can put forward an IVA proposal even after a bankruptcy order has been made, with a view to ‘annulling’ (cancelling) the bankruptcy at an early stage if the IVA is accepted by your creditors. However, you run the risk of going bankrupt again if for some reason the IVA is not successfully concluded.

Click for advice on bankruptcy alternatives or an Individual Voluntary Arrangements to avoid bankruptcy.

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