Consequences of Bankruptcy

In England & Wales, bankruptcy is initiated either by a creditor or by an individual, him/herself. 

For a creditor to make a person bankrupt, they must be owed more than £750 and must be able to prove their debt exists and that the individual cannot or will not pay it. 

If someone is unable to pay their debts they can petition for their own bankruptcy. This is referred to as a “debtor's petition”. The application must be made using the Court forms and lodged in the appropriate Court with £475 to cover Court fees and a deposit.  The application can be made in person at the local Bankruptcy Court or online through the Insolvency Service website.  For those resident in Greater London that will very likely be the High Court of Justice.  Elsewhere petitions and Bankruptcy Orders are dealt with in the local County Court.

Our Bankruptcy section within Debt Solutions sets out some of the main advantages and disadvantages to bankruptcy. Below we set out an outline of the main consequences of bankruptcy.

Investigation by the Official Receiver

Immediately following the Bankruptcy Order being made, the Official Receiver (a representative of the government’s Insolvency Service) is appointed to investigate the bankrupt’s affairs.  A bankrupt is under a legal obligation to provide full details of all their assets and liabilities, household income and general affairs, so that the Official Receiver can report prospects for recovery to creditors.  If there are assets in the Bankruptcy Estate, the Official Receiver will consider asking a Licensed Insolvency Practitioner to be appointed Trustee. 

Assets – those included and those not  

Virtually all a person’s assets, whether held here or abroad, are included in the Bankruptcy Estate.  This includes a person’s share in any jointly held property, shares and investments, and so on.  Some assets are, however, excluded from the bankruptcy. These include tools, books, vehicles and other equipment used in the bankrupt's employment, business or vocation; and such clothing , bedding, furniture, household equipment and provisions required to satisfy the basic domestic needs of the bankrupt and his/her family. A personal pension fund is normally also excluded. 

Family Residence  

The Trustee can force the sale of any residential property, even where it is occupied by a husband, wife or children.  Although the Trustee cannot enforce a possession order until one year has lapsed after the Bankruptcy Order, he will eventually succeed. 

That being said, most Trustees will be happy to consider offers for the bankrupt's interest in the home from the bankrupt’s family or friends, if this leads to a swift and economic realisation of monies for creditors. 

Effects on the Self-Employed or Traders  

Being bankrupt does not prevent a person from carrying on business as a sole trader (see below - 'Being Discharged' - about companies and directors).  Trading can, however, be difficult as stock in trade, plant and equipment, additional vehicles and business assets generally, held at the date of the Bankruptcy Order, may be seized by the Official Receiver or Trustee for the benefit of the estate. 

It will also be difficult raising credit for trade (including buying stock on account) and there may be problems with insurance cover.  

Contributions from Income 

The Bankruptcy Trustee also has the right to seek contributions to the Bankruptcy Estate from a person’s net disposable income, after taking account of reasonable household, family and living expenses.  However, the duty to make such payments is limited to 3 years from the date of the bankruptcy, no matter what the cause or extent of the bankruptcy liabilities. 

There are quite clear guidelines that are used to determine what is a fair contribution, intended to ensure that a family is not subjected to unfair hardship.  If a bankrupt finds that the level of income payment is set too high they have the right to appeal to the Court to set a reduced sum. 

Being Discharged  
Being discharged does not mean that the bankruptcy is over, or that any unrealised assets are returned to the bankrupt.  What discharge does mean is that a person is no longer subject to certain restrictions including:  

• Receiving or taking credit of more than £500 in any single transaction, without declaring their bankruptcy.
• Carrying on any self-employed business other than in the name they were made bankrupt (and notifying suppliers of the bankruptcy).  This restriction, incidentally, makes it practically impossible to trade in a partnership.  
• Disqualification from acting as a director of a limited company within the United Kingdom.

In most cases the Bankruptcy Order will be discharged automatically after one year, but the discharge can be suspended indefinitely if a person fails to cooperate with the Official Receiver or Trustee. 

Credit and Other Problems  
Nearly all finance companies, banks and many employers ask whether a person is or has been a Bankrupt.  Records of a bankruptcy are kept by credit agencies for at least six years.  For this reason difficulties with obtaining credit or getting work in certain professions can continue for a number of years, even after discharge. 

Bankruptcy Restrictions Orders
If a person has acted unlawfully or recklessly in accumulating their bankruptcy debts, they can be subjected to a Bankruptcy Restriction Order which may extend restrictions on credit and business activities for up to 15 years. 

Bankruptcy Offences  
Certain types of conduct prior to or during bankruptcy give rise to offences which can be punished by fines, imprisonment or both.  These mostly arise from concealing  property, misleading the Official Receiver or Trustee in their enquiries, or simply failing to cooperate with either of them. 

Antecedent Transactions  
Although not treated as offences, the Courts have special powers to overturn certain types of transaction that occurred prior to bankruptcy.  Essentially, these are concerned with ensuring that creditors are not treated unfairly.  Examples include gifts made to the bankrupt’s family that caused the insolvency or made it worse (called “Transactions at Undervalue”) or repayments made to some creditors in order to make them better off than others (called “Preferences”).  Time limits apply to such transactions which vary according to whether the recipient is an associate of the bankrupt or a family member. 

So, why go Bankrupt? 
We would never advise anyone to go bankrupt without first considering the other options available, such as an Individual Voluntary Arrangement (IVA).   Bankruptcy will never be a pleasant experience and it can involve very real penalties for homeowners, business people or people with professional qualifications. 

Nevertheless, bankruptcy does bring most claims against a bankrupt to an end (although there are exceptions eg.claims arising in matrimonial proceedings, criminal fines or gambling debts).   Bailiffs chasing old debts stop; so do calls from irate credit card offices and debt collectors.  For people without much in the way of assets and little realistic prospect of making an offer to creditors to compromise their debts (by using an IVA), bankruptcy can bring real relief and a chance to start again. 

To get an immediate indication of whether an IVA may be a viable option for you, complete our Self-Assessment Debt Test.

This article has been written for Relief4Debt, a division of Mercer & Hole, Chartered Accountants.  It should not be relied upon solely without further enquiry and/or detailed consultation with one of Relief4Debt’s suitably qualified advisors.