Bankruptcy: a plain English guide to the bankruptcy option
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 relaxed the rules of bankruptcy for individuals in 2003 (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:
- You have established that you are insolvent.
- You have considered what your personal and business objectives are.
- You have studied all available options.
- 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 under the current legislation.
- A Debtors petition to the court.
- A Creditors petition to the court.
- 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 08009700539 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 debtors 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 Creditors 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 debtors petition is too expensive or you simply cannot afford to go through that process yourself, it is possible to wait for a creditors 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!
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.
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.
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 Trustees 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
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 creditors behalf. Of course there has also a risk of incurring the wrath of the court and a prison sentence is possible.
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.
Once the bankruptcy term is complete and ou 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.
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.
Where can I find a bankruptcy Flowchart
We have produced a flowchart, which graphically illustrates the process of becoming bankrupt. Print this flowchart off for future reference!
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 40,000 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.