Bankruptcy is a formal statutory personal insolvency solution and only applies to individuals, whether in a personal or business (i.e. sole trader, partnership, unincorporated business etc) capacity, who cannot pay their debts when they are due. Many people can fall into this category and bankruptcy is one of a number of options available.
To be made bankrupt, a court has to issue a bankruptcy order against an individual and this can happen in three ways:
- you apply to the court if you’re unable to pay your debts and want to make yourself bankrupt
- your creditors apply to make you bankrupt if you owe them £750 or more (£5,000 from 1 October 2015)
- an insolvency practitioner or a creditor applies to make you bankrupt after a default on the terms of your Individual Voluntary Arrangement.
Nearly all bankruptcies are administered by the Official Receiver in England and Wales, who works for the Insolvency Service, a statutory agency within the department of Business, Innovation and Skills (‘BIS’). A small proportion of the cases, typically those with more significant assets, go on to be administered by an Insolvency Practitioner in private practice (such as ourselves).The choice of IP is usually determined by creditors. Whether the case is administered by the Official Receiver or an IP, the office holder is known as the Trustee in Bankruptcy.
The trustee is obliged to be fair in his/her approach but acts for the benefit of the general body of unsecured creditors. The trustee realises the available assets in the bankruptcy estate and distributes the proceeds, net of the bankruptcy costs, to creditors. Assets you own, such as your interest in your house, will usually be sold to pay off your debts. There are a range of assets which are generally excluded from a bankruptcy estate such as household furniture required for the reasonable domestic needs of the bankrupt and his/her family. A car may be excluded if it is not of ‘excess value’ for example if needed for work.
After you have been declared bankrupt, your unsecured creditors will lodge their claims with the trustee and with certain exceptions may not pursue you outside of the bankruptcy proceedings. This allows you to make a fresh start although there are restrictions for the twelve month period of bankruptcy during which you will be an ’undischarged bankrupt’. For example, you may not obtain credit of more than £500 without disclosing you are bankrupt or act as a director of a limited company. You will be normally be discharged from bankruptcy after twelve months although the administration of your bankruptcy estate and the realisation of assets can take considerably longer. You could be required to make contributions from any surplus income for up to three years. Credit ratings are adversely impacted generally for six years.
When to consider filing for bankruptcy
Bankruptcy may be suitable for you if all of the following apply:
- you cannot see a way to pay your debts
- you do not have many assets and your liabilities are greater than your assets
- you have little, if any, surplus income after meeting your household expenses
- you are unable or unwilling to enter into an Individual Voluntary Arrangement e.g to pay monthly contributions for five years to your creditors
- it is unlikely that your situation will improve.
Bankruptcy is a significant step which is a matter of public record and therefore some stigma attaches to it. However for some individuals who have no other viable options it can provide a welcome respite from creditor pressure and legal enforcement as well as being a sensible way of bringing matters to a conclusion for the benefit of the individual as well as their creditors.
We have extensive knowledge and experience in acting as trustee on bankruptcy cases. When acting as trustee in bankruptcy our approach will be commercial and pragmatic. We ensure that we take full account of the interests of creditors whilst being fair and reasonable at what will inevitably be a difficult time for the individual being made bankrupt.
We will complete a full review of your individual circumstances which, for businesses, includes the legal structure, an analysis of its trading position and, for example, the effect of any partnership agreements.
We can advise and assist with the process of making yourself bankrupt if it is the right option for you. In particular, if you own property such as an interest in a matrimonial home, we can give you specific advice on how that can be dealt with in bankruptcy which may well mean it will not be necessary for the house to be sold.