Personal Insolvency

The two main processes employed to deal with personal insolvency are Bankruptcy and Individual Voluntary Arrangement

What is Bankruptcy?

Bankruptcy is the legal process whereby control may be taken over an individual’s financial affairs if he or she is insolvent.

Insolvency means that the person concerned has liabilities which exceed their assets (other than on a temporary basis) and who as a result cannot pay their debts as and when they fall due.

How is a bankruptcy order made?

A bankruptcy order is made in a court at a hearing following the presentation of a bankruptcy petition by a creditor or on the application of the debtor. Orders are made in the county court with bankruptcy jurisdiction nearest the debtor’s residence or place of business, although H M Revenue and Customs are subject to special rules which entitle them to present petitions in the High Court in London regardless of the location of the debtor.

An application can be presented by the debtor (on payment currently of the deposit of £525 and a court fee of £180) or a petition can be presented by a creditor (on payment of the petition deposit of £1,500 and a court fee of £302) who is owed at least £5,000. Sometimes, creditors group together so that there are supporting creditors in addition to the lead or petitioning creditor. In the vast majority of cases, the petition is heard by a District Judge. The procedure is relatively informal with most hearings taking place in chambers (rather than in a court room) and with no wigs or gowns. The judge will want to make sure that the information contained in the creditor’s petition is correct and that the debt is still owed. In most cases, as long as the conditions for bankruptcy still exist, a bankruptcy order will be made there and then. The judge will make a note of the time and the bankruptcy will be in effect from that moment. In some cases, the judge might permit a short adjournment, for example to allow the debtor to obtain legal advice or if there is a real prospect of funds being raised to clear the debt.

If is not normally necessary for the debtor to be present at court for a bankruptcy order to be made. All that the judge will want to ensure is that reasonable steps have been taken to bring the petition to the debtor’s attention. In most cases the petition will have been served on the debtor personally, often by a process server, but there are alternatives, particularly if it appears that a debtor is avoiding service, such as advertisement in a local newspaper.

How can I apply for my own bankruptcy?

Before you take any action to apply for your own bankruptcy, you should get your own legal or financial advice from a solicitor, accountant or licensed insolvency practitioner about bankruptcy and the other options which may be available to you.

To apply for your own bankruptcy, you will need to complete the following forms:

The online application available via the website – this form is your request to the court for you to be made bankrupt and includes the reasons for your request.

The online statement of affairs available via the website  – this form shows all your assets (anything which belongs to you that may be used to pay your debts) and all your debts, including the names and addresses of the creditors and the amount you owe each one. The form contains a statement of truth that you will need to sign as verification of the contents of the statement.

Who will deal with my case?

Following the making of a bankruptcy order, an Official Receiver is appointed. Each court which deals with bankruptcy cases has an Official Receiver appointed to receive bankruptcy cases when orders are made. The Official Receiver is an employee of The Insolvency Service. His duties include investigation of the financial affairs of the bankrupt. He may report to the court and must produce a report for the creditors. In some cases, often at the request of a creditor or when the Secretary of State considers it appropriate, supervision of the bankruptcy is transferred from the Official Receiver to a trustee in bankruptcy, who must be a licensed insolvency practitioner. The Official Receiver or trustee can make an application to the court claiming any income that exceeds the amount needed to cover essential family living expenses. It is also the job of the Official Receiver or trustee to gather in any other assets which may be available in order to create a fund for payment of expenses incurred in the bankruptcy and, if possible, a distribution to creditors.

What does a bankrupt have to do?

Above all, a bankrupt must co-operate with the Official Receiver or any appointed trustee and must provide honest and full answers to any requests for information. Following the making of the bankruptcy order, the Official Receiver or one of his assistants will write to the bankrupt and ask him to attend for an appointment at his office. The bankrupt will be asked to complete a fairly detailed questionnaire including details of all assets and liabilities. The bankrupt must hand over assets if requested to do so together with all books and records, and other documents relating to his financial affairs.

It is necessary to declare any assets received or any increase in income during the bankruptcy. If there is surplus income, it is likely that an income payments order will be obtained requiring that income to be paid over.

The bankrupt must stop using any bank, building society or other money accounts right away and must not obtain credit to a total value of over £500. It is important to remember that credit includes hire purchase agreements and even a telephone account (if the cost of use of the account is likely to exceed the £500 limit).

It may also be necessary for a bankrupt to attend court and answer questions concerning the bankruptcy and the circumstances which have led to it. Failure to do so can result in the issue of an arrest warrant.

What difference does bankruptcy make?

With limited exceptions (mortgage and other payments secured against property, continuing utility bills, rent and other expenses following the bankruptcy order), following the making of the bankruptcy order it is no longer the responsibility of the bankrupt to make payments to individual creditors who were creditors at the time the order was made. Those claims are instead directed to the trustee and demands for payment should no longer be made direct to the bankrupt.

As for assets, they will legally vest in and be in the control of the trustee. If the bankrupt runs a business it is likely that it will have to be closed and employees will lose their jobs. Items which can be retained include tools and other equipment and perhaps vehicles which are necessary for use by the bankrupt in connection with his employment, business or vocation. Other items which can be retained include essential household items such as clothing, bedding, furniture and kitchen appliances.

Other assets will be gathered in by the trustee for disposal (including surplus income) and the funds realised as a result will be used to pay the expenses of the bankruptcy and, if possible, in making a distribution to creditors. The trustee may also seek to recover items which were transferred out of the bankrupt’s ownership prior to the bankruptcy in a way which was unfair to the creditors in general (such as gifts, transfers at undervalue and certain payments made to some creditors ahead of others).

What happens to the debts?

The bankrupt’s creditors will be notified of the making of the bankruptcy order and asked to submit claims for debts owed. The trustee will then administer the bankruptcy estate and report to the creditors. If there are no funds available, the bankruptcy will run its course and there will be no distribution to creditors. However, if there are funds available or recovered, the first thing to be paid out will be the expenses of the bankruptcy. After that, if funds permit, payments will be made in respect of the preferential entitlements of employees if there are any and next, if possible, there will be a pro rata distribution to the general creditors.

What happens to the bankrupt’s home?

Property owned by the bankrupt with sufficient equity to make a sale worthwhile will almost certainly be sold. The right to sell the property nearly always vests in the trustee in bankruptcy from the time when he is appointed.

An alternative to losing the house is for the trustee’s interest to be bought out by someone such as the bankrupt’s wife or a family member. This is important because the trustee will otherwise retain the right to realise his interest in the property, even after the bankruptcy (for three years).

If there are children under 18 living at the house, then it is possible to put off the sale for up to a year.

To protect creditors interests, the trustee will lodge a caution (in effect a charge) over the property at the Land Registry for the total sum owed in the bankruptcy. This means that within the three years after bankruptcy, if the house is sold, the trustee will be able to recover payment from the sale proceeds.

If the property is rented, the trustee will not be able to take possession. However, the landlord will probably be notified of the bankruptcy and the terms of the tenancy will often provide that the bankruptcy is a ground for terminating the tenancy agreement.

What is a bankruptcy restriction notice?

A bankruptcy restriction notice is an entry at the Land Registry against a property that is solely owned by a bankrupt. A restriction is automatically placed when a bankruptcy order is made. It puts on record that the bankrupt is no longer the legal owner of the property and does not have the ability to sell the property or enter into any other dealings in connection with the property – only the trustee can do this.

How will bankruptcy affect my bank account?

When a bankruptcy order is made, the bankrupt should immediately stop using his/her cheque books and bank cards and hand them over to the Official Receiver as soon as possible.

All the bank accounts are usually frozen by the bank when it becomes aware of the bankruptcy order. Bankrupts need to make alternative arrangements for receiving money and for paying standing orders and direct debits etc.

Some banks may allow a bankrupt to keep using their existing bank account, however, even if the bank agrees to this, they will freeze the account when they first hear about the order.

Any money in the bank account at the date of the bankruptcy order is an asset in the bankruptcy so it will be claimed by the official receiver or the trustee. However, the official receiver or trustee may decide to release some money to the bankrupt for necessary domestic expenses.

If the bank account is in joint names, the official receiver or trustee will decide how much of the money to release to the joint account holder.

If the bank account is overdrawn, the amount it is overdrawn by becomes a debt in the bankruptcy. A bankrupt must not make any payments direct to the bank, unless it has a charge (a form of security to ensure payment of a debt, such as mortgage) on the home. If the bank account is in joint names, the bank can ask the joint account holder to pay all the money owed. A bank account may be opened as long as the fact of the bankruptcy is disclosed. If allowed, there are likely to be fairly stringent conditions.

What must a bankrupt not do?

A bankrupt will commit a criminal offence if he:

  • Obtains credit of £500 or more without disclosing the fact of the bankruptcy.
  • Carries on business (directly or indirectly) in a different name without disclosing to all customers the name in which he was made bankrupt.
  • Is concerned (directly or indirectly) in the promotion, formation or management of a limited company (unless with the court’s permission).

Bankrupts cannot hold certain public offices.

How long will a bankruptcy last?

The bankruptcy will continue until the trustee brings it to a conclusion. But generally, a bankrupt will obtain his or her discharge at the end of 12 months. Discharge can be postponed if the bankrupt fails to co-operate with his trustee or to comply with any other statutory duty.

If funds realised in the bankruptcy are sufficient to clear all the debts and expenses, it is normally possible to apply early to annul the bankruptcy.

What is ‘discharge from bankruptcy’?

This is a process which takes away the restrictions of bankruptcy and releases the bankrupt from most of the debts owed at the date the bankruptcy order was made.

A bankrupt will normally get his discharge automatically, even if no payments have been made to his/her creditors, or he/she is still making contributions under an income payments order/agreement, or some assets have not been realised.

The official receiver can apply to court for a bankruptcy restrictions order, which will mean that the bankrupt will continue to be subject to restrictions after discharge for the period stated in that order. This will not affect the discharge of your debts.

How does a bankrupt get his discharge?

If a bankrupt is discharged automatically, they do not have to do anything to get their discharge.

A bankrupt may obtain a certificate of discharge if needed. This can be obtained by writing after the discharge date to the court which dealt with the bankruptcy. A certificate of discharge will be issued within about 4 weeks. A fee is payable to the court for issuing a certificate of discharge.

A bankrupt will not obtain discharge automatically if:

  • The discharge period has been suspended, for example because they have failed to co-operate with the official receiver or trustee.
  • The bankrupt was subject to a criminal bankruptcy order.

What is the effect of the discharge?

Debts – The bankrupt will be released (freed) from most debts that they incurred before the bankruptcy order.

The debts a bankrupt is not freed from include:

  • Any money owed under family court proceedings for example, for maintenance or CSA payments or arising from any personal injury claims against them, unless the court directs otherwise.
  • Any court fines or debts arising from fraud or certain other crimes.
  • Debts incurred after the bankruptcy order.
  • Since 1 September 2004, all outstanding student loans. If a bankruptcy order was made before 1 September 2004, a bankrupt may still have to repay their student loan. Clarification should be requested from the official receiver.

Mortgage Payments – secured creditors (lenders who hold security such as a mortgage for the money owed) still have the right to enforce or recover their security if payments are not met.

Assets – any assets that the official receiver or the trustee held or claimed during a bankruptcy remain under the control of the official receiver or the trustee. They are not returned to the bankrupt on discharge. It may be some time after discharge before all the assets are dealt with. If a bankrupt’s home has not been dealt with in a certain period, usually 3 years from the date of the bankruptcy order, the bankrupt’s interest in it may be returned to them.

If payments under an income payments order or agreement are being made, these must continue even after the date of discharge.

When a trustee makes a payment to creditors, he may place an advertisement about the bankruptcy in a newspaper asking creditors to submit their claims. If it takes the trustee a long time to deal with an asset, this advertisement may appear several years after the bankruptcy order.

Business – after discharge, a bankrupt may carry on a business without the restrictions that applied during the bankruptcy. A discharged bankrupt can act as a director of a limited company or be involved in its management (unless he/she is subject of a separate disqualification order or bankruptcy restrictions order).

A discharged bankrupt will be able to obtain credit without having to mention the bankruptcy (unless specifically asked to do so, or subject to a bankruptcy restrictions order)

A discharged bankrupt must continue to assist the official receiver and/or their trustee, for example by providing any information requested, even after their discharge. If they do not, they may be held in contempt of court.

Individual Voluntary Arrangement

This procedure is adopted when the debtor is unable to pay his or her debts but is able to make an offer to his or her creditors by which to effect settlement of their debts, typically at less that 100%, over a period of time so that Bankruptcy can be avoided.  It is also resorted to where the debtor wants or needs to remain in a form of employment or sphere of activity which has some fiduciary and/or regulated element from which he or she would be “disqualified” in the event of a bankruptcy order being made.

Under this process, the debtor enters a contract with his or her creditors, known as the Proposal, whose terms govern how the Arrangement is to be funded (commonly the disposal of assets, third party monies, “contributions” from income, etc or possibly a combination), and the timing and quantum of distributions to creditors. The Proposal is usually formulated and prepared a licensed insolvency practitioner, for submission to creditors for their approval. Approval need not be unanimous – a majority, in terms of value of claims, of at least 75% suffices.

In conjunction with the issue of the Proposal, the insolvency practitioner adopts the role of Nominee, and subsequently the role of Supervisor if the Proposal is approved, unless the Creditors vote for another practitioner to be appointed as Supervisor.

Once the Arrangement has run its course, the debts are expunged. If, however, the debtor does not observe the terms of the Proposal, and no variation is capable of being proposed, or any such variation is not approved by Creditors, the Arrangement is treated as being in default, and is therefore terminated by the Supervisor. Commonly, a consequence of termination is the presentation by the Supervisor of a bankruptcy petition against the debtor.

We at Panos Callender Callender & Co can assist you with your application for bankruptcy and with the formulation and issue of a Voluntary Arrangement Proposal, in both cases for an agreed fee.