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Bankruptcy

How can you become bankrupt?


There are two ways to be made bankrupt



  1. A creditor (someone you owe money to) can apply to Court to make you bankrupt.

  2. You apply to Court to make yourself bankrupt.

The main advantages/disadvantages of being bankrupt


 advantages



  • Bankruptcy lasts for a maximum period of 12 months

  • The debt situation is solved, i.e. you are given a fresh start

  • Once discharged, you will be free from the bankruptcy debts.

  • You have more control over how your assets will be dealt with.

  • You can still hold public office and there are less job/career restrictions although it is still best to check

  • You can trade as a sole trader but under the name under which you were made bankrupt.

disadvantages



  • You lose control of your assets.

  • You cannot get credit over £500 without informing the person you are obtaining credit from you are bankrupt

  • The bankruptcy is advertised

  • You cannot be a company Director while bankrupt

  • You cannot be concerned with the management, promotion or formation of a limited company while bankrupt

  • Certain careers are prohibited

  • You cannot trade under any other name other than that under which you were made bankrupt

  • Credit rating may be affected even after the bankruptcy has ended. It will be registered with credit reference agencies and will usually stay on file for a period of 6 years.

  • If you own your own business this will usually be closed down and your employees contracts terminated

 How to declare yourself bankrupt (this is known as a “Debtors Petition”)



  1. You can obtain the forms to make yourself bankrupt online – the application is available from The Insolvency Service website (link needed) and assistance is provided to help you complete your form.

  2. You can telephone or go to the nearest County Court to you which deals with bankruptcies and ask for the forms to enable you to declare yourself bankrupt. If you are unsure of the nearest County Court go onto the HM Court Service website – there is a Court locator.

To apply you will need to have approximately £400 in cash – the Court will be able to confirm the exact fee at the date you apply. The fee is made up of the Court fee, the Official Receivers deposit and a swearing fee; in certain individual circumstances the Court fee may be waived, you should check with the Court to see if this applies in your circumstances.


At the Court hearing the Court may either:-



  1. Make a bankruptcy order, or

  2. Dismiss the application, or

  3. Appoint an insolvency practitioner to set up an Individual Voluntary Arrangement (“IVA”), or

  4. Delay proceedings to make a future decision, this is known as an adjournment

 


 How can someone else make you bankrupt? (“Creditors Petition”)


Someone else can make you bankrupt if you owe them more than £750 (unsecured debt).


The creditor applies to Court using a bankruptcy petition, the petition is presented to the Court and the usual grounds used are that a debtor cannot pay his/her debts as they fall due.


If these grounds are used, the creditor must prove to the Court you are unable to pay your debts as they fall due and can usually do this by presenting a statutory demand which remains unpaid and has not been set aside or the creditor has obtained a judgement against you and execution is unsatisfied (ie the bailiff or sheriff has not been able to seize goods to the value of the debts).


The creditor can apply to the Court dealing with bankruptcies in an area in which you reside.


The bankruptcy petition must be served on you and a statement of truth will be lodged at Court verifying the bankruptcy petition and that it has been served on you.


The creditor pays the fees to the Court to make you bankrupt, this includes an amount for the Court fee and the Official Receivers deposit.


The Court will fix the date and place where the petition will be heard. If you wish to oppose the petition you must give the Court a statement of truth at least 7 days before the hearing.


At the Court hearing the Court may either:-



  1. Make a bankruptcy order, or

  2. Dismiss the application, or

  3. Delay proceedings to make a future decision, this is known as an adjournment

 


On the making of a bankruptcy order:

 

The Official Receiver (a civil servant in the Insolvency Service) will be appointed receiver and manager of the bankrupts affairs and he/she has a duty to protect all assets and administering the bankrupts affairs.

 

The Official Receiver may later be appointed Trustee or alternatively an insolvency practitioner may be appointed to deal with the administration of the bankruptcy estate and realising the bankrupts assets. Even when an insolvency practitioner is appointed Trustee the Official Receiver will still have a duty to investigate your affairs.

 

The job of a Trustee

 

The Trustees job is to realise the assets of the bankruptcy and to use the funds to pay the costs and expenses of the bankruptcy then to distribute the funds among the creditors.


On the Court making a bankruptcy order everything owned or said to belong to the bankrupt (the bankrupts assets) forms part of the bankruptcy estate – as a bankrupt you do not have control of your assets. All potential assets must be disclosed to the Official Receiver or Trustee who will then decide whether you can keep them.

 

If you own a property or other assets your Trustee will require them to be sold and their value paid into the bankruptcy estate, the funds are used to pay the bankruptcy costs and expenses and to pay creditors. Your bankruptcy assets are not returned to you at the end of the bankruptcy period, they may be realized without time limit ie even after your discharge. The only exception to this rule is your home which must be realised within 3 years.

 

In essence you will be required to give up any possessions you have of any value, the most common assets in a bankruptcy estate are:- house, savings, life policies and motor vehicles

 

Can you exclude any of your assets from bankruptcy?

Under bankruptcy no assets are excluded – you must inform your Trustee of all your assets however it is possible for a relative or friend of the bankrupt to buy back the bankrupts share in the assets from the Trustee.


How long will you be bankrupt?

Bankruptcy now lasts for a maximum period of 1 year unless you have failed to carry out your duties as a bankrupt in which case your discharge from bankruptcy could be suspended.


What are you required to do while you are bankrupt?

While you are bankrupt you have certain duties and responsibilities and these include providing information requested by the Trustee or Official Receiver to allow the bankruptcy estate to be administered and realised.



  1. You cannot while you are bankrupt obtain credit over £500 without telling the person you are asking for credit from you are bankrupt

  2. You cannot carry on business in a name which is different from that under which you were made bankrupt

  3. You cannot be a Director of a company or be concerned with (directly or indirectly) in the management, promotion or formation of a limited company

  4. You must not make any direct payments to your unsecured creditors; if you are unsure whether you should pay someone seek advice.

When you are made bankrupt you will be asked to provide details of your income and expenditure, if you have income which is in excessive of that required for day to day living expenses your Trustee can request you pay these funds into your bankruptcy estate for a period of up to 36 months. It is for the Official Receiver or Trustee to establish what you need for your day to day living requirements within guidelines set.


What if any of your debts are joint with another person?

If you have debts which are joint with another person or have been guaranteed by someone on your behalf the creditor can usually continue to pursue the non-bankrupt party for payment. The joint owner of the debt or guarantor should seek their own advice as to whether they need to make arrangements to pay the debt.


What if you have transferred assets to someone before being made bankrupt or have paid one creditor and not another?

The Official Receiver or Trustee will review the timing of the transaction and in the event of payment to specific creditors in priority to others will look at the reasoning behind your decision to pay that creditor.


If you have transferred property or assets belonging to you to another person prior to going bankrupt or have paid one person in priority to another the Official Receiver or Trustee can in certain circumstances apply to reverse the transaction or request compensation for the loss of that asset or payment of that debt.


Where can you get additional information?

 

Alternative sources of general information:-

 


  1. The Insolvency Service Website

  2. Citizens Advice Bureau 

  3. R3