Bankruptcy is often thrown around as a catch-all term for when a business or an individual is in extreme financial difficulty. In business, it’s called being in Liquidation, but in terms of this blog, we’re going to look at the individual and what happens when a bankruptcy order is made.
Bankruptcy is one way (there are others) that individuals can deal with debts that they cannot pay. The process of bankruptcy ensures that your assets (the things you own) are shared among those who you owe money to, also known as your creditors.
When you have been made bankrupt, you can start again, free from debt, though there are some restrictions to this.
There are three reasons why a bankruptcy order can be made:
The cost of applying to become bankrupt is £680, however, if you owe less than £30K and have no assets you might be able to get a Debt Relief Order which costs far less at £90.
You can make an application for bankruptcy yourself online. If someone else makes you bankrupt, you’ll receive a copy of the petition so you’re aware of what’s happening. You can ask the court not to make you bankrupt but you will likely need to pay the debt you owe in order to prove to the court that you don’t owe the money.
Next in the process, you’ve got to hand over all the information you have on your finances and a list of your assets. You’ve got to tell anyone who offers to loan you over £500 that you’re bankrupt, and you have to tell your trustee (either an official receiver or a private sector insolvency practitioner) about any rise in income during your bankruptcy. You must go to court to explain why you owe money if you’re asked to.
Whilst bankrupt, there are some restrictions until your bankruptcy is discharged (usually 12 months). You cannot:
If your bankruptcy is approved, you’ll have an interview with the official receiver. This could be face-to-face or by telephone. A report will be sent to your creditors which can take 8-12 weeks to process. The official receiver will also report to the Insolvency Service if they suspect you have broken the law in your financial matters.
The official receiver will take control of your assets, unless an insolvency practitioner, such as Even Keel Solutions is appointed. This person is called the ‘trustee’. The trustee will sell your assets and then tell your creditors how the money will be shared, though they must make a formal claim. You can’t make payments directly (there are a few exceptions such as to secured creditors like your mortgage provider) and the trustee can put an advert in the paper asking creditors to submit claims.
The costs of the bankruptcy process are paid before the creditors. This is upwards of £8,000 plus 15% of the total value of assets realised. After that creditors will be paid, as will interest on debts and if you had any employees, there are certain debts in relation to them which will be paid.
If there isn’t enough money your bankruptcy will still be processed. If there is money left after everyone is paid in full, it will be paid to you, and you can apply to have your bankruptcy cancelled (annulled). If an insolvency practitioner is appointed as the trustee, there will be a different fee structure and you should ask how much it will cost to administer your case.
Your assets will need to be given to the trustee. You can keep things that you need for work or everyday household items like clothing and furniture, however, if these items are valuable, they can be taken by the trustee and replaced with a cheaper alternative.
Your home, if you own it solely, can be sold, if it’s the only way to pay your creditors. Any equity passes to the trustee, as does the legal title to prevent you from selling it or making deals connected with it. A bankruptcy restriction is added to the land registry but will be removed once the trustee has been paid for their interest in the property.
If you own a property jointly, then it is your share of the equity that transfers to the trustee, plus a restriction is added to your Land Registry record which is removed once the trustee has been paid from any sale which you may instigate.
If you have a partner or children living with you, your property can’t be sold without your agreement for a year from the date of the bankruptcy order. If you can get a friend or relative to buy the equity, the sale can be stopped. If you fall behind on your mortgage payments, your lender may sell your home.
Your bank account will be frozen and money within it counted as an asset and claimed by the trustee. You can ask to release some money for your daily living needs and if it’s a joint account, to the other person.
You can open a new account after the bankruptcy order, but you must tell the bank or building society that you’re bankrupt.
Since 2000, most UK state pension schemes are not included in bankruptcy and cannot be claimed by the trustee.
Payments made to you from your pension scheme can be used to pay off some of the debt owed. If you have been able to, but have chosen not to, take money from your pension, following changes to the law in 2015, the trustee may look at the value of your available pension fund. If you die while bankrupt, the trustee will claim any death benefit, unless someone else has been nominated, within the pension scheme, to receive it.
It will be sold unless you need it for work or vocation or to meet basic domestic needs where alternative transport is not practical. If your vehicle is exempt but valuable, it can be replaced with a cheaper alternative of around £2k in value.
If you’re experiencing difficulty with your personal financial affairs and need some help, please do get in contact with us for a no-cost initial and confidential conversation. Call us on 01202 237337.
We’re an experienced team with strong values. We like to understand your needs and ensure you have the best advice possible. We’re experts in all areas of insolvency; you can read more about us on our website here.
Blog source and more detailed information:
Our download guide is ideal for both accountants and business owners. You’ll get the benefits of our 30+ years experience in one easy to read guide.
Afterwards, you’ll not only gain a better understanding of the processes, but you’ll also discover how we’ve helped hundreds of companies and provided peace of mind to countless business owners.
