Personal Insolvency

Bankruptcy

Bankruptcy is a solution designed to help an insolvent person repay as much of what they owe as possible while writing off debts they cannot pay. In a bankruptcy, your assets pass into the control of a trustee who may sell these assets to raise money to repay your creditors. The trustee will either be a government official (the Official Receiver) or a licensed insolvency practitioner.

During a bankruptcy, you will be subject to some restrictions for one year. Once the year is up, most people will be discharged from bankruptcy. Once you have entered bankruptcy, your creditors will not be able to take action against you in relation to debts that were owed prior to the start of the procedure. During a bankruptcy you will still need to keep up with ongoing commitments, like rent, mortgage payments, or bills, including new credit card or utility bills.

Debt Relief Order

A Debt Relief Order (DRO) has the same consequences as bankruptcy; however to be eligible you must meet a stricter criteria, however the costs of a DRO are less than in bankruptcy.

What are the criteria to be eligible for a DRO?

• you owe £30,000 or less
• you have less than £75 to spend each month, after paying tax, national insurance and normal household expenses
• you’ve lived or worked in England or Wales in the last 3 years
• your assets aren’t worth more than £2,000 in total
• you’ve not had a DRO in the last 6 years

What is the cost of a DRO and how do I apply?

You can only apply for a DRO through an ‘approved intermediary’. This is an authorised debt adviser, who will make the application on your behalf. A list of advisors can be found at https://www.moneyhelper.org.uk/en/money-troubles/dealing-with-debt/use-our-debt-advice-locator?source=mas#

You won’t be eligible if you are involved in bankruptcy proceedings or any other formal insolvency procedure. However, if one of your creditors has asked a court to make you bankrupt, you may ask the creditor for permission to apply for a DRO instead.

It costs £90 to apply for a DRO.

How do I enter bankruptcy?

There are two ways to enter bankruptcy. A creditor, or group of creditors, may ask the court to make you bankrupt if you owe them £5,000 or more. Alternatively, if you wish to make yourself bankrupt, you may apply online to the government’s Adjudicator (part of the Insolvency Service). To enter bankruptcy, you must be insolvent: you must be unable to pay your debts when they fall due. Unlike a Debt Relief Order, there are no limits on the value of the assets or debts you can have before entering bankruptcy.

If you wish to enter bankruptcy, it will cost £680 in government fees. These fees can be paid in instalments, but they must be paid in full before the bankruptcy order is made. If your creditors are applying to make you bankrupt, they will pay the costs of doing so.

To be made bankrupt, you must reside in England or Wales.

Which of my debts and creditors will be affected?

With some exceptions, your bankruptcy will affect your unsecured debts. Once you are bankrupt, your unsecured creditors will not be able to take action against you in relation to any of the debts you owed when the procedure started. It is important to remember that this does not apply to secured creditors, such as a mortgage provider. They may still take possession of your property if you do not keep up with payments.

As with all statutory solutions, there are some debts which cannot be written off by the procedure. Once the bankruptcy ends, you will still owe the following:

• Any debts which are secured against an asset you own
• Debts arising from fraud or fraudulent breach of trust
• Child maintenance
• Student loans
• Social Fund budgeting and crisis loans
• Fines for drug offences
• Court-ordered damages or fines
• TV licence debts
• Any debts incurred after the bankruptcy started.

What will happen to my assets and income?

In a bankruptcy, any assets you own at the time of the bankruptcy order, or which you acquire before you are discharged, will pass into the control of a trustee. The trustee may sell these assets to raise money to repay your creditors.

There are some assets which will not pass to the trustee. These include everyday household items (like bedding or furniture), tools you might need to do your job, and cars worth less than £1,000. If any of your household items are particularly valuable, these may be sold by the trustee, who may be required to replace them with a reasonable alternative.

The trustee may return assets to you if it is not cost-effective to sell them. The trustee also has the power to retrieve assets you may have given or sold to someone else in the period before your bankruptcy. You will usually be able to keep any money you have put into a pension, although any money you are receiving as part of a pension will be considered as income.

Your trustee may require you to make a contribution to your creditors out of your income if you have sufficient surplus income to make a contribution to the bankruptcy estate every month. This is known as an Income Payments Order (IPO) or Income Payments Agreement (IPA). These orders or agreements last for three years.

If I own a home, what will happen to it?

Your trustee will seek to access any equity you have in your home and use this money to help repay your creditors. Equity is the difference between the value of your home and any sums owed to anyone with a charge on your property, such as your mortgage provider. If you are able to raise money equivalent to the equity in your home, you may purchase the interest from your trustee. A third party, such as your partner, a relative, or a friend, may also offer to purchase the equity in your home. If you are unable to raise funds to purchase the equity, you may be required to sell the property or hand the property to the trustee to sell.

If you have low or negative equity (where your home is worth less than the value of what you owe to the mortgage provider), the trustee will be unlikely to try to sell your home. If a trustee has not realised the equity in your family home, or dealt with it by making an application to court, in the three years after the bankruptcy begins, the home is returned to you and the trustee can take no further action.

The sale of your home as part of your bankruptcy will be delayed by up to a year if your spouse/ civil partner or children live in the property. This may be extended if there are exceptional circumstances.

Once you have been made bankrupt, you must still keep up with your mortgage payments: as a secured debt, your mortgage is not covered by the bankruptcy. If you stop paying your mortgage, your mortgage provider may take steps to repossess your home. If your mortgage provider is not able to recover all that you owe it once it has sold the property, the outstanding debt becomes an unsecured debt in your bankruptcy and you will no longer owe it once you are discharged.

Who oversees the bankruptcy?

All bankruptcies are overseen by the government’s Official Receiver as trustee in the first instance. The Official Receiver may pass a bankruptcy to a licensed insolvency practitioner to act as trustee in some circumstances.

The trustee will look into your finances and assess your situation. This might involve an interview with you. You must provide your trustee with any information they request from you, and you must provide them with full details about your assets and what you owe. Failure to cooperate with your trustee could lead to your bankruptcy term being extended and will increase the costs associated with your case. These costs will be paid for by the sale of your assets, if you have any assets to sell. The trustee is responsible to all your creditors equally. They do not represent one particular creditor.

How else might I be affected?

If you are in a bankruptcy, you will be subject to the following restrictions:

• You cannot borrow more than £500 without telling the lender about the bankruptcy
• You cannot act as a company director without the court’s approval
• You cannot start, manage or promote a company without court approval
• You cannot work as an insolvency practitioner

These restrictions will lift once you have been discharged. It is a criminal offence to break the restrictions.

Some organisations may impose their own restrictions on people who have been made bankrupt. Your bankruptcy will remain on your credit history for six years from the date it started. Once you have been made bankrupt, your name will also be added to the government’s Individual Insolvency Register. This register is publicly available. Your name will be removed from the register three months after you have been discharged.

How long will a bankruptcy last?

You will be subject to bankruptcy restrictions for one year. At the end of the year, you will be discharged and will not be responsible for the debts you owed at the start of the bankruptcy. Discharge may be suspended for a variety of reasons, including non-cooperation with the trustee.

After your discharge, your trustee will still retain the assets you had at the start of the bankruptcy and they will continue to work to raise money to repay your creditors. This process can carry on long after you have been discharged.

Can a bankruptcy be cancelled or extended?

It is possible to apply for the annulment of a bankruptcy order where it can be shown that the order ought not to have been made or the bankruptcy debts and expenses have all been paid in full, or if you have agreed an IVA with your creditors. The annulment of a bankruptcy order effectively restores the position to what it was immediately before the bankruptcy order was made. In other words, an annulment effectively cancels the original bankruptcy order — it is as if the bankruptcy order was never made.

If you have not complied with your obligations during the bankruptcy, you may be made subject to a Bankruptcy Restriction Order. This Order may last up to 15 years. Under such an Order, the restrictions imposed upon you by the bankruptcy will continue. You may also agree to extend the period for which the bankruptcy restrictions apply by agreeing to a Bankruptcy Restriction Undertaking. Your trustee may also apply to court for the automatic discharge.

How do I pay for bankruptcy?

As above, £680 in government fees are due at the start of a bankruptcy. Once you have entered bankruptcy, statutory costs and the trustee’s costs will be paid for through the realisation of your assets, if you have any. If you do not have enough assets to pay for all the costs and debts associated with your case, you will not be asked to pay more.

Where the Official Receiver is the trustee, they will charge a percentage of the assets they have realised during the bankruptcy.

In cases where an insolvency practitioner has been appointed as trustee, the fees will often be based on the time the trustee has spent on the case. Cooperating with the trustee is therefore an effective way to keep their fees down: cooperation will mean the trustee does not have to carry out additional tasks as they seek to fulfil their legal duties. An insolvency practitioner’s fees will be agreed by your creditors.

In all cases there will be a government statutory fee of £6,000. All these fees will be paid out of the bankruptcy deposit and the realisation of bankruptcy assets. Should there be insufficient assets to pay these fees in full, you will not be asked to pay the outstanding amount. However, if you seek to annul the bankruptcy on the basis that your debts and expenses can be paid in full, you will still need to pay this fee.