Bankruptcy

Bankruptcy enables individuals to make a clean start and generally Bankrupts will receive an automatic discharge after three years. Although many people are forced into Bankruptcy by their creditors, it is possible for the individual to take the initiative by serving their own Petition.

At one time a dreadful stigma was attached to bankruptcy. In fact not so long ago bankrupts could be thrown into prison.

In today’s world where credit is readily available it is all too easy for borrowings to become an insurmountable financial burden.

In addition, in the business environment other business failures and slow payers can cause cash flow difficulties resulting in escalating borrowings together with the inherent interest burden.

If debts are increasing despite every effort to meet demands from creditors then sometimes bankruptcy is the only practical solution.

The Procedure

A Bankruptcy Order may be made against an individual in one of two manners:

The individual may present a petition himself to the Court and request a Bankruptcy Order be made against him.
Alternatively, a creditor may present a bankruptcy petition and if the debtor is unable to meet the amount claimed by the creditor, the Court will make a Bankruptcy Order.

Once the Bankruptcy Order has been made it is advertised in the London Gazette (an Official Publication which contains legal notices) and in a local or national newspaper or sometimes both.

In most cases the first person the bankrupt will come in contact with is the Official Receiver. The Official Receiver is part of the Insolvency Service and is responsible for dealing with the initial formalities of bankruptcy proceedings, which consists of protecting the debtor’s assets and establishing full details of the debtor’s liabilities. The Official Receiver may request that an insolvency practitioner be appointed to deal with the case.

If an independent insolvency practitioner is appointed he becomes the bankrupt’s Trustee in Bankruptcy. If an independent practitioner is not appointed then the Official Receiver will become the Trustee in Bankruptcy.

What is the effect of a Bankruptcy Order?

Once a Bankruptcy Order has been made against a debtor then creditors cannot take any further action whatsoever to recover monies due. The only exceptions are:

Any creditor who holds a mortgage over your property.
Amounts due in respect of Court fines or any obligations arising as a result of family proceedings or a maintenance order made under the Child Support Act 1991.
Whilst suppliers of services, such as gas and electricity cannot demand payment of any bills that arose prior to the Bankruptcy Order, they are able to ask for a deposit towards payment of future supplies or alternatively they may wish to see the accounts transferred into the name of a spouse or partner.
Any damages in respect of Personal Injury claims against the debtor.

Assets

As a Bankrupt, any assets owned immediately vest (in other words, title of the assets is transferred without the need for a contract or conveyance), in the Trustee upon his appointment. If the bankrupt was running a business this would normally have to be closed and employees dismissed.

The only assets that a bankrupt is entitled to retain, unless they have an individual significant value, are:

Tools, books, vehicles and other items of equipment which are needed to ensure the continuance of self employment or trade;
Clothing, bedding, furniture, household equipment and other basic items which are required to meet the basic needs of the family.

Pensions

There has been a lot of press regarding Pensions and Bankruptcy in the past, however certain sections of the Welfare Reform and Pensions Act 1999 have now been enacted therefore all approved personal pensions and occupational pensions are excluded assets and do not vest in the Trustee in Bankruptcy.

Property

Upon the appointment of a Trustee in Bankruptcy any property, either freehold or leasehold, solely or jointly owned, mortgaged or otherwise forms part of the bankruptcy estate and will be dealt with by the Trustee. It is possible that the residential home may have to be sold.

The bankrupt may be in a position where a partner or spouse can purchase his interest; alternatively, he may be able to raise sufficient funds within his own family or via friends to acquire the Trustees interest in the property.

It is important that bankrupts understand that even after they have received their discharge from bankruptcy any property that remains unrealised still vests with the Trustee and will never revert back to the bankrupt.

The benefit of any increase in value will also belong to the Trustee in Bankruptcy until the interest in the property has been realised. Therefore, even if the house is sold sometime after the bankrupt has received his discharge any increase in value will still go to the Trustee in Bankruptcy.

At Bankruptcy we are more than happy to advise bankrupts regarding their property.

Restrictions on a bankrupt

During the period that a person is bankrupt, the following are criminal offences:

Obtaining credit of more than Ł250 without disclosing the fact that a bankruptcy order exists
Carrying on a business in a name other than those detailed in the bankruptcy proceedings, without disclosing that fact that a bankruptcy order exists
Being concerned, either directly or indirectly with the management, promotion or formation of a company without the permission of the court

In addition, bankrupts are prohibited from holding certain public offices, and from acting as a trustee of a charity or pension fund.

What are the duties of a bankrupt?

The Insolvency legislation imposes certain duties and obligations on the bankrupt. Failure to attend to these duties and obligations is contempt of court.

Bankrupts should therefore:

Provide both the Official Receiver and the Trustee in Bankruptcy with full details of assets and liabilities and such other additional information as either party may reasonably request
Tell the Official Receiver or Trustee in Bankruptcy of any assets that are acquired during the course of the bankruptcy, such as an inheritance or a lottery win
Advise the Official Receiver or Trustee in Bankruptcy of any increase in income
Immediately stop using any bank accounts
Not make any payments to any creditors

How long does bankruptcy last?

Generally a person is automatically discharged from bankruptcy three years after the making of the bankruptcy order. In some circumstances (currently when the bankruptcy estate consists of assets greater than Ł2,000 and liabilities of less than Ł20,000) the bankruptcy order only lasts for two years

Debts incurred after the making of a Bankruptcy Order

A bankrupt is responsible for all liabilities incurred after the date of the bankruptcy order. Incurring further debts could result in a second bankruptcy order.

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