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Bankruptcy a Guide
Only individuals can enter bankruptcy, it is not an option for limited
liability companies, it is a much misused word that tends to be used by
people, commentators and journalists to describe business failure.
For individuals this is the last resort. However, the UK Government has
recently relaxed the rules of bankruptcy for individuals (see “No Fault
Bankruptcy” below).
The following guide to bankruptcy cannot be comprehensive given that it is a
general discussion of the process, application for bankruptcy and exit from
it. This mechanism can be very complex depending on your individual
circumstances. It is important that you take professional advice before
entering bankruptcy.
Other alternatives are available and it is vital that you consider all of
those options by reading about them on this online guide and if necessary
talking to us by e-mail or through our telephone support line.
If bankruptcy is your preferred option please check that you have gone
through our suggested decision-making process before reading on:
1. You have established that you are insolvent.
2. You have considered your personal and business
objectives are.
3. You have studied all available options.
4. You have decided to enter bankruptcy because the business is not viable
and your assets are outweighed by your liabilities and you're insolvent on
the cashflow test.
No Fault Bankruptcy.
Under the Enterprise Act 2002 the UK Government has
significantly relaxed the rules regarding bankruptcy. From April 2004 the
sole trader who has a failed business (where there are no issues of fraud,
misfeasance, recklessness etc) will be able to file for bankruptcy (see
process below) and be discharged from that bankruptcy within say 12 months.
Previously a bankrupt was not discharged until 3 years had elapsed.
We believe that this is a good step but we are concerned that the Government
appears NOT to be prepared for what we think will be a huge rise in
bankruptcies as a consequence of the loosening of the process. Consumer debt
is sharply rising and many people may use the new rules to release
themselves from credit card and bank debt.
The new approach will be particularly powerful where the debtor has no real
assets, such as equity in the matrimonial home or private pensions and
investments.
Provided the bankrupt conforms to the rules and is compliant with the
Trustee (see below) the bankruptcy can be a quick and powerful process.
It is possible nowadays to obtain mortgages and
credit for discharged bankrupts, so this process may be better for your
personal future than trying to plough on with an unviable business through
trading out or
Individual Voluntary Arrangement. Click these links to compare the other options.
Bankruptcy: the Process.
There are three different ways that bankruptcy can be initiated a under the
current legislation.
1. A Debtor’s petition to the court.
2. A Creditor’s petition to the court.
3. The supervisor of an individual voluntary arrangement petitions the
court.
If you have considered all the above please ensure that you gather together
all available information with regard to your personal and business
financial circumstances. Put together a file of information all in one place
to include: all legal actions against you, copies of any accounting
information, copies of any financial plans and business plans, copies of
business and personal creditors statements and a list of all of your assets.
Also a good bit of advice, always make notes (or minutes) of meetings,
telephone conversations and discussions with creditors. Date them and make
sure that you save or file them safely. This will act as a good record if
things become difficult in the next few weeks and months.
It is also important to draw up a very basic statement of affairs which
compares your assets against your liabilities.
Once you have prepared this file and if you wish to have assistance please
do call us on 0800 9700 539 or e-mail us. Alternatively contact any local
insolvency practitioner; you can find one in the Yellow Pages for example.
We would thoroughly recommend obtaining professional advice before deciding
finally upon bankruptcy.
Only cease trading when it becomes impossible to continue through cashflow
pressure or when you have taken professional advice. It may be that the
situation that has brought this to a head can be dealt with through an IVA
or an informal deal with creditors and it is important to keep all avenues
open until profession advice has been taken.
A Debtor's Petition.
Find the address of your local County Court in the local telephone directory
and visit the Court office to pick up a debtors petition pack. The Court may
levy a fee for this but you will find that the court officials are very
helpful and can often help you with the completion of the form. The form is
necessarily complex and copious and if you require help please contact the
court official that gave you the document.
Once you've completed the form and supplied all information that it
requires, take the completed file back to the court along with filing fee.
This is known as a debtor’s petition basically you're asking the court to
hold a hearing at which you will be made bankrupt. This is not as
frightening or as daunting as it may sound and you'll find the Court is
sympathetic to your situation.
If bankruptcy is the only option, it is, in our opinion, better for the
debtor to initiate this process. This has the effect of
crystallising the position and removing the
pressure. This also mitigates the cost for creditors of doing
it themselves.
A Creditor’s Petition.
It is possible for a creditor to issue a petition for bankruptcy if the debt
that they are seeking to recover has been proven. Often this requires a
County Court Judgment or a Statutory Demand to have been served upon the
debtor.
The creditor may have also tried to recover the funds due to him or her via
a warrant, a bailiff or a Sheriff.
Typically this type of action can be initiated by the Inland Revenue / VAT
where there are outstanding debts - if this is the case, please do not
hesitate to contact us because there are other ways to deal with the
situation other than through bankruptcy; unless of course the business is
not viable.
Alternatively if the debtor’s petition is too expensive or you simply cannot
afford to go through that process yourself, it is possible to wait for a
creditor’s petition. We wouldn't recommend this because it demonstrates to
the court and to the creditors that you have been burying your head in the
sand. This may not, of course, be true but this is the perception. By
allowing a creditor to go through the petition process the court will grant
the hearing and you may be made bankrupt by the court in your absence.
A Supervisor's Petition.
If you're in an IVA (individual voluntary arrangement)
which is failing or under severe pressure please do not hesitate contact us.
We may be able to assist by restructuring the IVA or indeed replacing the
IVA, you will have of course have to demonstrate viability and a reason why
the IVA has not been adhered to.
The supervisor will normally issue a petition to bankrupt you when the IVA
has failed. This may be because you have failed to keep up with the regular
payments prescribed by the IVA or you have failed to supply information or
comply with the general terms of the IVA.
Prior to commencing this action the supervisor will generally have to issue
an abort certificate demonstrating to you and the creditors that the IVA has
failed. Of course prior to this he or she is likely to have communicated
with you, in writing, several times asking for the voluntary arrangement to
be adhered to.
If you have ignored all these issues and still believe that the business is
viable or that you are still a lot better off in an IVA; once again please
do not hesitate contact us. Be prepared to explain to us why you have
ignored all of this communication!
The Hearing.
Once the petition (from whichever source) is received by the court a hearing
date will be set by, the Court officials. This can be anywhere from one day
to two weeks dependent upon available Court time.
At the hearing the court will consider the statement of affairs and the
documents produced by you or the creditors and grant a bankruptcy order.
Typically the Official Receiver is appointed as trustee in bankruptcy. But
if there are significant assets an insolvency practitioner (IP) may be
appointed trustee in bankruptcy at the by the Official Receiver or by the
court directly.
The Official Receiver, once trustee, will interview the debtor to check
through his/her documents and to establish his or her income and financial
position. In the event that there are significant assets, as described
above, an official receiver may appoint a local insolvency practitioner as a
trustee in bankruptcy. The IP will seek to recover those assets over a
period of time on behalf of the creditors.
The Estate.
All assets belonging to the debtor and like him are included in the estate.
Some of those assets however may, of course, be charged to or have partial
ownership by another individual or individuals.
Where exclusive ownership cannot be established, you will have guessed or
estimated the amount of the asset that you believe to belong to you, in your
statement of affairs.
Typically items such as motor vehicles (under hire-purchase agreements),
mortgage property such as matrimonial homes and assets under a partnership
agreement may only be partially available to the trustee on behalf of the
creditors.
Nowadays, the undischarged bankrupt is allowed to maintain tools of the
trade. This may include a modest motor vehicle and will definitely include
hand tools etc. Large tools such as lathes and machinery will usually not
fall into this description unless they have little re-sale value. And, where
furniture and other items belonging to the bankrupt are under disputed
ownership, it is unlikely that the trustee will seek to recover them. For
example a TV bought jointly by husband and wife.
Excluded creditors.
Bankruptcy does not however dismiss all debts. Items such as CSA (Child
Support Agency) payments, maintenance to spouse, government fines, mortgages
or items under hire-purchase arrangements are excluded.
The Government has also moved to close a loophole
that allowed Student Loans to be written off in bankruptcy.
The Matrimonial Home.
Typically in bankruptcy 50 per cent of the unencumbered equity in any
matrimonial home is available to the trustee in bankruptcy for the
creditors. But the equity in many houses is modest and the cost of pursuing
this equity often outweighs the benefit of collection.
It may be possible to maintain, with the permission of the trustee, the
matrimonial home. This, of course, is largely dependent on whether the
mortgage company is prepared to continue to receive mortgage payments and
whether you are able to meet those payments.
For example your spouse may have sufficient income to meet the mortgage
payments and if there is not a significant chunk of equity available to your
estate, as described above, it may be advantageous to maintain the property
through the bankruptcy period.
Changes to the Rules on Matrimonial Homes.
This is a very complex area but one that all people
planning bankruptcy should read. Where the bankrupt has equity in his/her
matrimonial home (and another person is entitled to 50% of the equity), the
Trustee can register a Caution at the Land Registry. This prevents the home
from being sold without the Trustee’s permission.
Where the bankrupt has gained new equity this equity can be available to the
Trustee for the creditors even YEARS AFTER THE BANKRUPT IS DISCHARGED. This
can be very distressing and is an area that most insolvency professionals,
bankrupts and dischargees would like to see tackled.
In the new regime for bankruptcy we understand that the Trustee of a
bankrupt will still be able to register a caution, once he/she has
discharged the bankrupt he/she will only have 12 months to “use it or lose
it”. At the time of publishing this we do not know whether this has been
finalised or not. But clearly this is an area that should concern all home
owners facing bankruptcy
.
Professional Qualifications.
It is not possible for an undischarged bankrupt to be a Justice of the Peace
or a Member of Parliament. Other professional qualifications can also be at
risk if you enter bankruptcy such as being a solicitor, a chartered
accountant, certified accountant or registered Auditor. Nor may you be
member of a local authority. If in doubt you should take advice from your
professional organisation whether bankruptcy will affect your ability to
continue under your professional qualifications.
Income Payment Orders.
Should you obtain a new job with a higher salary than previously, or a
higher disposable income than indicated to the court and the trustee, it is
possible for the trustee to seek to recover some of this excess remuneration
through an IPO (income payments order).
For example if you stated that your net disposable income was £200 per month
and subsequently obtained a position that gave you £1,200 per month
disposable income, then it is likely that the trustee will seek to recover a
large percentage of this difference.
If you fail to agree he can apply to the court for this order to be ratified
by a judge. To fail to maintain such a payment may be an offence. A trustee
may seek to recover these amounts directly. If you fail to comply he/she may
seek to sell property or other assets that he holds on the creditor’s
behalf. Of course there has also a risk of incurring the wrath of the court
and a prison sentence is possible.
The Rules.
Once made bankrupt you may not be, without the permission of the court, a
director of a limited company in the United Kingdom. To do so is a criminal
offence. You may not act as a manager of a limited company in the United
Kingdom or in act in the formation of a company in the United Kingdom during
the course of your bankruptcy.
During bankruptcy you may not obtain credit of greater than £250 it without
disclosing that you are an undischarged bankrupt. To do so as a criminal
offence.
You he may not be a partner in a partnership.
Whilst you may continue to trade as a sole trader or a severe restrictions
placed upon the bankrupt. For example you must not trade under a new name or
different name to that which you traded under prior to being made bankrupt.
If you trade in a different name this is a criminal offence.
Discharge.
Once the bankruptcy term is complete and you have conformed to the wishes of
the trustee in bankruptcy; you are discharged from bankruptcy.
Although this means that most debts are written off some are not such as
government fines, child-support etc as discussed previously. However debts
to the Inland Revenue, VAT and other trade creditors in the period up to
your bankruptcy are written off.
It may be possible to start rebuilding your credit rating and to obtain a
position of director or partner in a partnership for example. After say 12
months your personal emotional state, health and enthusiasm may have
returned to normal. So it may be a new start.
Summary.
Once again we would reiterate that the above can only be a general guide to
bankruptcy. There are many rules and regulations under the Insolvency Act
appertaining bankruptcy and with a huge variety of causes of bankruptcy and
different structures of bankrupt estates, it is impossible to answer all
questions in a computer-aided guide.
If you have any doubts as to the current situation you face please revisit
the how to use this site page and followed the instructions there.
We have produced a
flow chart, which graphically illustrates the process of becoming
bankrupt.
Finally we would like to point out that bankruptcy is often just what is
required to crystallise and clear up a very difficult situation. Many people
have emerged from bankruptcy and gone on to be much happier, wealthier and
possibly wiser!
In the United Kingdom between 10-15,000 people each year enter into
bankruptcy. In recessionary times this can rise as high as 25-30,000 people,
with the new rules this could rise to over 30,000 per annum. Therefore you
are not alone.
However, bankruptcy should only be used where all other avenues have been
considered, this website studied and professional advice has been taken.
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