What is bankrupcy?

Bankruptcy is a way of dealing with debts that you cannot pay. Whilst you are bankrupt assets that you own might be used to pay off your debts. After a period of time (usually 12 months) all your outstanding debts are written off. The effects of going bankrupt are the same whether you file your own petition or are made bankrupt.

Changes to bankruptcy law under The Enterprise Act 2002
The Enterprise Act was introduced on 1 April 2004 in the UK, and changed insolvency law. Most of the changes came into force on 1 April 2004.

Prior to the Enterprise Ace bankruptcies lasted either 2 or 3 years depending on the value of the debts. Now every first-time bankrupt is discharged automatically within 12 months.

Pre Enterprise Act
If you have been made bankrupt before you will not be automatically discharged after 12 months. If you were made bankrupt at any time in the 15 years before your current bankruptcy order was made, you will be discharged on the earlier of 5 years from 1 April 2004 (i.e. 1 April 2009) or any earlier discharge date ordered by the court. You may apply to the court for your discharge 5 years after the date of the present bankruptcy order, if this date falls before 1 April 2009.

Your home
Under the law prior to 1st April 2004, if you own or have a financial interest in a property at the date of your bankruptcy order, it may be sold to pay your debts. When you are made bankrupt, your financial interest in a property automatically transfers to the trustee in bankruptcy (who may be an insolvency practitioner or the Official Receiver). The trustee will then recover any value in your interest in the property for the benefit of creditors. This can take place any time after your bankruptcy order has been made and is not affected by your date of discharge.

Post Enterprise Act
Under the Enterprise Act, the trustee has 3 years from 1 April 2004 (or the date you file for bankruptcy) to deal with your interest in any home that was your only or main residence (or that of your spouse or former spouse) at the date of your bankruptcy order. The trustee has the options of:

Selling it.
Applying for an order for sale.
Applying for an order for possession.
Applying for a charging order against the property.
Reaching a formal agreement with you that the property does not form part of your bankruptcy estate.
There is an exception to this rule when the trustee was unaware of your interest in a property before 1 April 2004. In this case, if you notified the trustee of the interest by 1 July 2004, the trustee has to deal with it by 1 April 2007. If you failed to notify the trustee by 1 July 2004, the trustee will have three years to deal with it from the date on which he or she becomes aware of that interest.

Income payments orders
You may apply to court to have an income payments order varied or stopped.

Income payment arrangements agreed with the Official Receiver will continue for 36 monthly payments unless your circumstances change.

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Filing your own petition
You can make yourself bankrupt.

Obtain a form from your local County Court offices. It costs £345 plus £150 court fee, payable when you submit your form to the court. You may get help with the fee if you are on a low income.

Once the application is filed you are given a date for a hearing in front of a District Judge, which is often on the same day. The judge decides whether it is appropriate to make the order.

If the order is made you will then be required to see the Official Receiver. The Official Receiver will want to go through all your personal details with you such as National Insurance number, and pension policy details. This is usually by phone.

Once you have gone bankrupt any property that you own, including your home gets ‘vested’ in the Official Receiver, or if you have substantial assets, an appointed trustee. This gives them a legal interest in the property, which enables them to sell it.

Assets
Once the bankruptcy order is made the Official Receiver or appointed trustee may wish to sell assets.

Your assets are referred to as your estate but certain goods are exempt from inclusion. These are things such as:

Clothing.
Bedding.
Furniture and household equipment for basic domestic needs.
Items necessary for you to carry on your employment can be excluded e.g. tools, books or vehicles.
If you have valuable household items such as antiques or stereo equipment these could be sold in order to raise money. Your car might be sold if it is valuable but if it is necessary for your employment if may be exampt.

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Your home and other property
If you own property and there is any equity (value) in it, it might be sold.

If the property is your family home the sale can be delayed for 12 months to give you time to find somewhere else to live.

With jointly owned property the Official Receiver is usually only entitled to the bankrupt person's share of the equity. It may be possible for the joint owner to make an offer to the Official Receiver to buy out the other person's share of the equity.

If there is no equity in the property then the Official Receiver may not want to sell it immediately. If you have a mortgage on the property you need to keep making the monthly payments to stop the bank/building society taking possession action.

If a property has not been sold at the end of the bankruptcy period the property must "revest" in the owner ie, she/he recovers legal rights over it. However to protect unpaid creditors a charge may be placed on the property. The debts then become secured on the property and are paid off if there is sufficient equity when the property is sold.

Will I have to pay anything from my wages?
This will only happen if your income is above average and it appears that you might have surplus income. The Official Receiver can look at your income and expenditure and decide if payments should be made and at what level.

When looking at how much you could pay they will take into account essential expenses such as your mortgage and housekeeping. If you will not pay voluntarily, the court can order you to pay.

The effects of bankruptcy
Bankruptcy affects your financial affairs in a number of ways:

Obtaining credit
You must declare your bankruptcy if you want to obtain credit of more than £500.

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Bank accounts
You will have to close your bank account when you are made bankrupt. The bank may allow you to open another account.

Fuel and other utilities
Gas/electricity and phone companies usually want you to pay in a way that does not involve you having credit. This might be a pre-payment plan or meter, or by demanding a large deposit. If you live with a spouse or partner you could transfer the account to their name.

Your business
A business that is trading will normally close down. You can continue to be self-employed but some people find it difficult if it is the type of work which involves getting credit for more than £500. This can include having time to settle bills e.g. 30 days to pay.

Employment
Some types of employment may be affected.

If you belong to a professional body which prohibits bankruptcy you could be struck off, e.g. solicitors.

If you work in the finance industry you will lose your consumer credit licence.

Whilst you are bankrupt you cannot be a director of a company or hold a public office.

Offences
Previous actions may be considered an offence in bankruptcy and you could be fined or in some circumstances imprisoned. Examples of offences include:

Not keeping proper accounts for your business for up to two years before the bankruptcy.
Concealing ownership of property from the Official Receiver.
Giving property away to avoid it being included in the bankruptcy
Obtaining credit of £500 or more without telling the lender that you are bankrupt
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After the bankruptcy period
Even after the bankruptcy period you may find it difficult to obtain credit. The bankruptcy order will be registered with credit reference agencies for 6 years and even after this time you may be asked whether you have ever been bankrupt when applying for some credit such as a mortgage.

Individual voluntary arrangements
An individual voluntary arrangement (IVA) is arranged through the courts and can be a way of avoiding bankruptcy. To get an IVA you need to be able to raise a lump sum of money or to make regular payments from your income to your creditors.

Arranging an IVA
You need to find an insolvency practitioner who is prepared to act for you.

The insolvency practitioner prepares a proposal to put forward to your creditors. The creditors who together are owed 75% of your debt must agree to accept it as a full and final settlement. If it is for payments from your income the arrangement will usually last for two to three years. If the arrangement is not kept to then the practitioner or the creditors can apply for a bankruptcy order to be made.

Insolvency practitioner fees can be expensive and some will want some payment in advance. It is worth asking several practitioners what their charges are before asking them to act for you. You can obtain names of local practitioners by contacting the court offices or Official Receivers office for your area.

Remember: You can always seek advice about any difficulty you are having in dealing with your debts.




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