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Bankruptcy
What is Bankruptcy?
Bankruptcy is one way of dealing with debts that you cannot afford to repay. It is a legal procedure where the court acknowledges that you are unable to repay your debts and appoints someone (known as a ‘trustee’) to take control of your existing financial affairs. The bankruptcy proceedings will:
- Offer you a fresh start by freeing your from any overwhelming debts (subject to some restrictions); and
- Ensure that any assets that you have at the time of bankruptcy are shared out fairly among your creditors.
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Bankruptcy is a very serious matter and should only be considered as a last resort – even though bankruptcy does offer a way of dealing with a debt problem, it can also have some extremely serious implications which could affect your home, your employment, your future credit and your personal reputation. It is therefore essential that you seek professional advice before deciding whether or not to become bankrupt.
Depending on your personal circumstances, bankruptcy may not be the most appropriate way of dealing with your debts. In most cases, bankruptcy is only a suitable strategy if:
- You do not own your own home (e.g. you live in a rented property, etc)
- You have a low income
- You have no available savings or assets (e.g. anything that can be sold, such as a car, property, etc)
- You have debts that have arisen which cannot be dealt with in any other way
How are you made Bankrupt?
In order to become bankrupt, a form (known as a ‘bankruptcy petition’) must be presented to the court. This form is usually presented either by you (known as a ‘debtor’s petition), or one or more of your creditors (known as a ‘creditor’s petition’).
If you wish to make yourself bankrupt, you must ‘petition’ the court on the grounds that you are no longer able to repay your debts. To do this, you should complete the forms 6.27 (the debtor’s petition) and 6.28 (the statement of affairs), both of which can be obtained from your local County Court offices.
You should complete the petition and the statement of affairs in capital letters and using a black ink pen. If you are dealing with a County Court, the court will need the completed forms and 2 photocopies of each before they can consider your petition for bankruptcy. Once completed, you should take these forms (and any copies), along with the court fees and deposit to the Court office and ask for your petition to be dealt with.
If you petition for your own bankruptcy, you will be expected to pay a fee (however, if one of your creditors applies to make you bankrupt, this fee is not payable). In order to become bankrupt, you will be expected to pay:
- The Court fee (which is currently £150; and
- A deposit to cover the costs of administering your bankruptcy (which is currently £310
These fees must be paid in cash, by postal orders, or by a building society, bank or solicitors cheque. Personal cheques will not be accepted and all cheques should be made payable to “H.M. Paymaster General”.
If you are in receipt of certain state benefits or on a particularly low income, you may not have to pay the court fee. However, everyone, regardless of personal circumstances, will be expected to pay the deposit of £310. Although these costs may seem quite high, when compared to the amount of debts most people have before going bankrupt and the costs involved with, for example, an Individual Voluntary Arrangement (IVA), the costs are fairly cheap.
At the court, you will need to swear an affidavit that the information you have given is true. The court may then either fix a time for your hearing or the hearing may take place straight away. The hearing will take place in front of the District Judge, and will usually take place on the same day that your petition is sworn. As bankruptcy is a civil and not a criminal matter, the hearing will usually take place in chambers and not a courtroom, so there will be no jury or anyone else there, just you and the District Judge.
It is important to remember that although bankruptcy proceedings may involve the courts, being in debt is not a crime and bankruptcy is not a form of punishment – it is just a way of offering you a fresh start, free from debt.
The District Judge will usually want to confirm that you have obtained professional debt advice from a reputable organisation, such as the Citizens Advice Bureau, and will decide whether or not it is appropriate to make a Bankruptcy Order. The judge can:
- Dismiss the petition – if they believe there is a more appropriate way of dealing with your debts, such as setting up an Administration Order; or
- Stay the proceedings – if, for example, the court believes that it needs further information, it may ‘stay’ (suspend) the bankruptcy petition, until that information can be provided; or
- Appoint a licensed Insolvency Practitioner to make an Individual Voluntary Arrangement (IVA) if it considers it more appropriate. However, it is unlikely that this will happen unless you have assets of £4,000 or more, your unsecured debts total less than £40,000 and you have not been declared bankrupt, nor made an application for an IVA within the previous 5 years; or
- Make a Bankruptcy Order – if they consider that there are no grounds to dismiss or stay the proceedings, and that an IVA would not be more appropriate.
If the Bankruptcy Order is made, it will take immediate effect and your next step should be to make an appointment with the Official Receiver (the court will supply you with contact details for the Official Receiver in your area). The court will notify the Official Receiver’s office (usually on the same day) that a Bankruptcy Order has been made.
The Official Receiver is a civil servant in the Insolvency Service and an officer of the court, and will be responsible for administering your bankruptcy. The Official Receiver will act as your ‘trustee in bankruptcy’ (unless the court appoints an Insolvency Practitioner to take this role), and will need to interview you go through a detailed questionnaire to look at your personal and financial details. The interview with the Official Receiver will normally take place on the same day that the Bankruptcy Order was made, and may be carried out over the telephone (although in some cases, you may be required to attend the interview at the Official Receiver’s office). It is essential that you fully co-operate with your trustee (e.g. the Official Receiver or an Insolvency Practitioner), as failure to do so could result in you being arrested. You must also:
- Provide the Official Receiver with all the information that they require, relating to your financial affairs
- Inform the Official Receiver about any assets and increases in income that you receive during your bankruptcy period (such as a legacy in a will, or a pay increase)
- Stop using your bank and building society accounts, credit cards, debit cards and similar accounts straight away. However, you may be allowed to open another account after you have been made bankrupt, but you may be restricted to the type of account you can have. Usually, you will only be able to open a ‘Basic Bank Account’ (e.g. one with no debit card to use in shops, no cheque book or cheque guarantee card, no overdraft – just a cash card to get money from the ATM)
- Hand over all of your assets over to the Official Receiver with all of your account books, records, bank statements, insurance policies, etc and any other documentation that relates to your assets or debts
- Not get apply for credit of £500 or more (whilst you are bankrupt) from any person without informing them that you are a bankrupt
- Not make any repayments directly to your creditors for money that you owed them before the Bankruptcy Order was made. If you are to make any payments during bankruptcy, they must be made directly to your trustee (who will then pay the appropriate person)
After looking at your personal and financial details, if it appears that you have an income over and above a certain amount, you may be asked to sign a legally binding agreement to pay regular ‘reasonable’ instalments from your income to your trustee for a period of up to 3 years (starting from the date of the agreement). This payment will then be distributed among your creditors to help satisfy some of your debts. This is known as an ‘Income Payment Agreement’.
You must inform the trustee of any changes in your circumstances (such as any increases or decreases in your income) as the agreement can be looked at again, and changed, if necessary, to reflect your new circumstances.
If you have sufficient income, but you do not make an Income Payment Agreement, the trustee can apply to the court, and force you to pay the instalments they want by deducting the money directly from your wages. This is known as an ‘Income Payment Order’, and will run for a period of 3 years from the date the order was made. Again, if your circumstances were to change at any point during the term of the Income Payment Order, you can ask the court to look at this again, and change it to reflect the changes in your situation.
The Official Receiver will then write to all of your creditors to inform them of the bankruptcy and will send them a report containing a summary of the statement of affairs. The Official Receiver may arrange a meeting of all known creditors (which you may be required to attend), although this is not very common. Whether or not a meeting of the creditors is called, the trustee (e.g. the Official Receiver or an Insolvency Practitioner) will prepare a schedule to dispose of your assets (if any) to pay either some or all of the debts.
What are the advantages of Bankruptcy?
The advantages of bankruptcy include:
- By having the Official Receiver take control of your finances and acting on your behalf, you will no longer have to negotiate with your creditors yourself, and all of your creditors will have to deal with your trustee (e.g. the Official Receiver or an Insolvency Practitioner). This will normally remove much of the stress, anxiety and depression often associated with being in debt
- Bankruptcy can offer you a fresh start – the aim of becoming bankrupt is to free you from and overwhelming situation and allow you to get on with your life – free from debt
- The decision by the court is final and cannot be changed – creditors are forced to recognise that you cannot afford to repay the whole debt, and will have to stop pursuing you for payments
- Depending on the circumstances, bankruptcy will normally last for a maximum period of 12 months (but remember that any Income Payment Arrangement or Income Payment Order will normally last for 3 years). For most people, this is a significantly shorter amount of time when compared to how long it would have taken them to have repaid their debts in any other way
- After discharge, most debts are ‘written off’ (e.g. they cease to exist) and cannot be pursued by your creditors (however, you are still liable to pay certain debts, such as court fines, maintenance payments, child support payments, etc – call us for more details)
What are the disadvantages of Bankruptcy?
The disadvantages of bankruptcy include:
- Any assets you own may be taken and sold to help repay your debts. These can include any property you own (e.g. houses, etc), vehicles, and electrical equipment (such as a TV, home computer, stereo, etc). However, this does not normally include everyday household items, such as beds, fridges, etc.
- Any assets that you acquire during the term of your bankruptcy, such as an inheritance, can be taken and sold to help repay your debts
- You will have to be interviewed by the Official Receiver who will thoroughly investigate your personal circumstances. You must allow your financial affairs scrutinised by officials
- You will be expected to pay the court fee and a deposit. Everyone, regardless of personal circumstances, will be expected to pay the court fee. However, the deposit is not payable if you are in receipt of certain state benefits or if you are on a low income (call us for more details)
- Any bank or building society accounts that you may have will be closed down. It is possible to open another bank account after you have been declared bankrupt, although you may be restricted to the type of account you can have by the bank
- Secured creditors are protected, meaning that even after you have been declared bankrupt, if (for example) you had a mortgage, the mortgage company will still expect the mortgage to be repaid
- You cannot obtain more than £500 of credit without first disclosing that you are bankrupt, and may be limited to the services that a bank or building society can offer you
- Your credit rating can continue to be affected for up to 6 years or more, making it difficult and possibly more expensive to get a mortgage or other loans and borrowings in the future
- Your current employment or future ambitions may be affected. You may not be allowed to hold certain public offices or practice certain professions, such as a Member of Parliament, school governor, magistrate or working in the financial service industry
- You are obliged to inform the trustee (e.g. the Official Receiver or Insolvency Practitioner) of any changes in your personal circumstances during the period that bankruptcy lasts (usually 12 months). This includes a change to your income, a change of address, and the receipt of any inheritances or financial wins (such as the National Lottery, etc)
- You may have to make regular payments (Income Payment Order) to the trustee if they feel that your income is high enough throughout the bankruptcy period
- There is a stigma attached to bankruptcy that often leaves people feeling as though they have been judged and humiliated. In addition, your name will be published in the local press and the London Gazette – meaning that friends, family members, work colleagues and complete strangers could find out about your situation
How long does bankruptcy last?
You will normally be freed from the effects of bankruptcy (known as ‘discharged’) after a maximum period of 12 months. This period could be slightly shorter if the Official Receiver concludes their enquiries into your affairs, or could be longer if you do not fully co-operate with their enquiries.
It is important to remember that if you have an Income Payment Arrangement or Income Payment Order in place, these will run for 3 years and you will still be expected to pay these instalments even after your bankruptcy period has ended.
You will normally get your ‘discharge from bankruptcy’ automatically (even if no payments have been made to your creditors) and you will not have to do anything. However, if you wish, you can obtain a ‘Certificate of Discharge’. This is no necessary in the majority of cases, but if you require proof of your discharge, you should write to the court that dealt with your bankruptcy, giving your name, address, and court number (taken from the most recent piece of correspondence regarding your bankruptcy). Please note, that there is a fee of £60 which is payable to the court for issuing a Certificate of Discharge (with further copies costing an additional £1 each).
Do not write to the court any sooner than 2 weeks before your discharge date. The court will then check with the trustee that you are entitled to an automatic discharge, and you should receive your certificate confirming your discharge within about four weeks.
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