Bankruptcy

What are the advantages?

Bankruptcy is one way of dealing with debts you cannot pay.

• The bankruptcy proceedings free you from overwhelming debts so you can make a fresh start subject to some restrictions and make sure your assets are shared out fairly to your creditors.
• Anyone can go bankrupt, including members of a partnership, though there are different rules for companies.

And the disadvantages?

Just because you are in debt does not mean that have to become bankrupt. Bankruptcy is a serious matter.

• It will almost certainly involve the closure of any business you run and the dismissal of your employees
• You will have to give up any possessions of value and the interest in your house
• You will be subject to certain restrictions.

You should therefore look at the alternatives to bankruptcy as soon as possible, in case they are more suitable to your situation.

If bankruptcy proceedings are taken against you, or you are thinking of making yourself bankrupt, you should get advice from a Citizens Advice Bureau or an Insolvency Practitioner.

I still wish to proceed. How do I do so?

A court makes a bankruptcy order only after a bankruptcy petition has been presented. It is usually presented by yourself (debtor's petition) or Creditors who are owed at least £750 by you (Creditors' petition).

A bankruptcy order can still be made even if you refuse to acknowledge or agree to the order. You should therefore co-operate fully once the bankruptcy proceedings have begun. If you dispute the creditors' claims you should try and reach a settlement before the bankruptcy order is made.

How is it done?

Bankruptcy petitions are usually presented either at the High Court in London or a County Court near to where you live or trade. A petition can be presented against you even if you are not present in England or Wales at that time, when you normally live in, or have a recent residential or business connection with, England or Wales. If you want to make yourself bankrupt you should contact your local court. They can give you the name, address and telephone number of the nearest county court that deals with bankruptcy. You will have to pay a fee to the court.

The Official Receiver is a civil servant and an officer of the court. He is responsible for administering bankruptcies and will act as trustee of your estate unless a private sector insolvency practitioner is appointed. One of the Official Receiver's main duties is to investigate your financial affairs for the period before and during your bankruptcy. He may report to the court and has to report to creditors. He will also report any matters which indicate that you have committed criminal offences in connection with your bankruptcy.

When a bankruptcy order has been made you must:-

• Go to the offices of the Official Receiver and provide information relating to your financial affairs
• Provide the Official Receiver within 21 days of the making of the bankruptcy order a full list of your assets and what you owe
• Look after and then hand over your assets to the Official Receiver and all your books, records, bank statements relating to your property and financial affairs
• Tell your trustee about assets or increase in income you obtain during your bankruptcy
• Stop using your bank, building society and similar accounts straightaway
• Not obtain credit
• You may also have to go to court and explain why you are in debt. If you do not co-operate, you could be arrested.

The Official Receiver will tell your creditors that you are a bankrupt. He may remain the trustee himself or he can arrange a meeting of creditors to choose an insolvency practitioner to be the trustee. You may have to go to this or any other meeting. The trustee will tell the creditors how much money will be shared out in the bankruptcy. Creditors then have to make their formal claims by a certain date. The costs of the bankruptcy proceedings are paid first from the money that is available. The costs include fees that the Official Receiver or the insolvency practitioner has to take from your assets when they are sold and a fee for the work. Claims from your employees and Government departments such as the Inland Revenue, HM Customs and Excise and the Department of Social Security might be paid next.

If you own your own home it will probably have to be sold to go towards paying your debts. However, your husband or wife, whether or not a joint owner, may be able to put the sale off for up to a year. This gives them time to make other housing arrangements or to discuss with your trustee how and on what basis your interest might be purchased by them or a relative or friend. Your husband or wife should be encouraged to take legal advice about the home as soon as possible.

Often a legal disposal of your interest can be arranged even if that interest is very small. This will prevent a forced sale at some future date. If the trustee is unable, for the time being, to sell your home he may obtain a charging order on it. The amount covered by the charge will be the total sum owed in the bankruptcy, including costs, which must be paid, with interest, from your share of the proceeds when you or the trustee sell the property. Until then your interest in the home belongs to the trustee, including any increase in its value, even though you may be discharged. If you rent your home the trustee will normally have no interest in it and cannot therefore sell it. However, if you do not comply with the terms of the tenancy agreement the landlord may take action against you. In most cases the Official receiver or your trustee will need to tell your landlord that you are bankrupt.

Once bankrupt, It is a criminal offence for you to:

• Obtain credit of £250 or more either alone or with another person, without disclosing your bankruptcy.**
• Carry on business (directly or indirectly) in a different name from that in which you were made bankrupt without telling all those you do business with the name in which you were made bankrupt.
• Be concerned (directly or indirectly) in promoting, forming or managing a company without the court's permission, whether formally appointed a director or not.
• You may not hold certain public offices.

(** NOTE: Obtaining credit is not just borrowing money. It includes, for example, hire purchase agreements.)

What can I do?

• You may open a new bank or building society account but should tell them you are a bankrupt. They may impose conditions and limitations.You should ensure you do not obtain overdraft facilities or write cheques which are likely to be dishonoured. Tell your trustee about money you have in the account which is more than you need for your normal living expenses. Your trustee can claim the extra amounts to pay your creditors.

Generally you will be automatically freed from bankruptcy (known as "discharged") after 3 (sometimes 2) years. You will also become free from bankruptcy immediately where the court annuls the bankruptcy order. This will normally be where your debts and the expenses of the bankruptcy have been paid in full. But if you have not carried out your duties under the bankruptcy proceedings the official receiver can tell the court and your discharge may be postponed. You will not get automatic discharge from bankruptcy if you have been bankrupt before within the last 15 years. You will only be able to apply to the court for your discharge 5 years after the date of your current bankruptcy order. Even then the court may refuse or delay your discharge.

Debts Discharge releases you from most of the debts you owed at the date of the bankruptcy order. Exceptions include debts arising from fraud, certain crimes and fines. Certain other debts such as damages or personal injury or money owed under family proceedings (such as maintenance) will be released only if the court thinks fit.

Assets You Owned or Obtain Before Your Discharge

When you are discharged there may still be assets that you owned either when your bankruptcy began or which you acquired before your discharge, which the trustee has not yet dealt with. These may include your home, an insurance or pension policy, an interest in a will or trust fund etc.

These assets are still controlled by the trustee, who can deal with them at any time in the future. This may not be for a number of years after your discharge. In certain cases such as your family's home and some types of insurance policy, your husband or wife, a relative or a friend may want to buy your interest. He or she should get in touch with the trustee straight away to find out how much they would have to pay. You must tell the Official Receiver about assets you obtain after the trustee has finished dealing with your case but before you are discharged. These assets could be claimed to pay your creditors.

Assets You Obtain After Your Discharge.

Usually you may keep all assets you acquire after you are discharged.

Bankruptcy deals with your debts at the date of the bankruptcy order. After that date you should manage your finances more carefully. However, if you then incur new debts, this could result in

• A further bankruptcy order even before you are discharged from the first bankruptcy which may have more serious consequences for you and/or prosecution if you failed to disclose your bankruptcy when the debts were incurred.

Alternatives to bankruptcy:

Informal Arrangement.

If you know that you cannot pay all your debts or you need more time, you could consider writing to your individual creditors to see if you can reach some compromise. Include a timetable of when you will pay them. The disadvantage with an informal arrangement is that it is not legally binding so your creditors could ignore it later on and want you to pay in full or immediately. The Citizens Advice Bureau (listed under C in the telephone book) publish several helpful leaflets and could help you to make this kind of arrangement.

ADMINISTRATION ORDERS

If one or more of your creditors has obtained a court judgement against you, the county court might make an administration order. Your total debts must not be more than £5,000 and you should have enough regular income to make weekly or monthly repayments.

You do not have to pay a fee for an administration order but the court will take a small percentage from the money you pay towards the cost of the administration order.

Getting an administration order is cheaper than going bankrupt and it may reduce the chance of your creditors asking for you to be made bankrupt.

However, if you do not pay regularly the order could be cancelled and you may become subject to the same restrictions as someone who is a bankrupt. If your circumstances change and you cannot pay as ordered, you can apply to the court to change the order. The court will tell you what to do.

IVA

This is a formal version of the arrangement described on the IVA page. An Individual Voluntary Arrangement means you make a formal proposal to your creditors to pay part or all of your debts. You need to apply to the court and you must be assisted by an Insolvency practitioner. Any agreement reached with your creditors would be binding on them.