Bankruptcy is a very serious matter and should only be considered in situations of serious financial hardship. You will have to give up any possessions of value and your interest in your home, if you are a homeonwer. It will almost certainly involve the closure of any business you run and the dismissal of any employees. Bankruptcy will also impose certain restrictions on you. Consequently, you should look at all of the alternative debt solutions to bankruptcy as soon as possible in case they are more suitable in your situation. The Insolvency Service leaflet "Alternatives to Bankruptcy" sets out some of these alternatives and these are always discussed by MoneySave’s trained debt advisers.
A Bankruptcy Order may be obtained by any creditor owed more than £750, or you can personally apply for your own bankruptcy at your local County Court. In practice, just under 85% of all bankruptcies in England & Wales are petitioned by the consumer themselves. Either way, assuming a bankruptcy order is granted, the Official Receiver (OR) - a government official - will then be appointed as your Trustee and will contact you for details of your financial position. Subject to certain exemptions listed below, this means that your assets will be sold and the money raised used to pay your creditors back as much as possible. Occasionally, the Official Receiver will appoint an Insolvency Practitioner to act as Trustee in their place, but this is generally only done when the case is complex.
The items you will be allowed to keep include:-
- Ordinary household contents
- A modest motor vehicle (valued at no more than £2,500)
- Tools of the Trade - things that you need to run your business
- Pension (subject to certain exceptions)
If you have equity in your property, this may result in the property eventually being sold - but the Trustee will do their best to avoid this and will try and work with you to ensure you retain your home, and this could be done by arranging for a family member or friend to buy out your interest.
The family home [whether freehold or leasehold, solely or jointly owned, mortgaged or otherwise] will form part of the bankrupt’s estate which will be dealt with by the Trustee. The home may have to be sold to go towards paying debts.
From January 2011 the following changes came into effect:
- The Official Receiver (OR), as Trustee of the bankruptcy estate, will no longer dispose of a bankrupt’s interest in a family home until 2 years and 3 months after the Bankruptcy Order is made, except if an offer is received which is in the creditors’ interests to accept.
- At 2 years and 3 months a review will begin. In cases where the bankrupt’s interest in the property is valued at less than £1,000, steps will be taken to re-vest the property interest in the bankrupt.
- Otherwise, if there is insufficient equity to attract an Insolvency Practitioner (IP) to act as the trustee of a bankruptcy estate, then enquiries will be made as to whether the bankrupt or a third party would be interested in purchasing the interest, assuming the property interest may be worth more than £1,000. If it is not possible to transfer the interest, and the interest is valued in excess of £1,000, the OR will consider applying for a charging order.
- If there is sufficient equity in the property, and if the Official Receiver is not aware of any willing purchaser, a Secretary of State appointment of an IP trustee may also be sought.
- The Official Receiver has the discretion to effect an early re-vesting of the property back to the bankrupt in specific circumstances.
Until the client’s interest in the home is sold, or until the trustee obtains a charging order over it, that interest will continue to belong to the trustee. This is typically time limited to 3 years and will include any increase in the property value. The benefit of any increase in value will go to the trustee to pay back some of the client’s debts, even if the home is sold some time after they have been discharged from bankruptcy.
If, after a certain time, usually 3 years, your trustee has not sold or obtained a charge over your interest in the property, or applied for an order of possession or obtained a charging order against the property, or the client has not come to any arrangement with the trustee about that interest, it may be returned to the client.
Income Payment Orders and Income Payment Arrangements
An IPO is an Income Payments Order and the trustee may apply to court for an IPO, which requires the client to make contributions towards their bankruptcy debts from their income. Historically, the court would not make an IPO if it would leave you without enough income to meet the reasonable domestic needs of client and their family. If the client has an increase or decrease in income, the IPO can be changed. IPO payments continue for a maximum of 3 years from the date the order is made by the court and may continue after the client has been discharged from their bankruptcy.
An IPA is an Income Payments Agreement where the client enters into a written agreement with their trustee to pay an agreed amount of their income to the trustee for an agreed period, which cannot be longer than 3 years.
Historically there were no fixed guidelines on IPOs or IPAs, with each case being assessed individually. In November 2010, The Insolvency Service issued a new guide on IPOs and IPAs.
From 1 December 2010, two main changes came into effect:
1. the minimum amount that the Official Receiver (OR) seeks to claim under an IPA or IPO reduced to £20 a month. This will substantially increase the number of bankrupts required to make a 3 year contribution to their debts;
2. the bankrupt no longer retains any of the remaining surplus income once all their reasonable household expenditure is accounted for. This now follows the same guidelines as for an IVA or DMP where the Common Financial Statement (CFS) is used.
The following are examples of expenses which are likely to be disallowed (unless there are special circumstances):
- Gym membership, any sports expenses or club membership
- Additional pension contributions to enhance a pension
- Private healthcare insurance
- Money for gambling, alcohol or cigarettes
- Satellite TV
- Excessive mortgage payments
Applying a 'Nil tax' code
If you pay tax under PAYE, HM Revenue and Customs (HMRC) will usually apply a 'nil tax' for the rest of the tax year in which you were declared bankrupt. This means that soon after the bankruptcy order, your employer will be told NOT to take any more income tax from your wages for the rest of the tax year. HMRC applies nil tax codes for various reasons, and the new tax code will not tell the employer that the employee is bankrupt, though you should be mindful of this if there are dismissal clauses in your employment contract for this situation. The nil tax code does not mean no tax is due. It just enables HMRC to claim the whole of your unpaid tax for the year of your bankruptcy.
There will be extra money in your pay because of the nil tax code, and this additional income can form the basis of an IPA or IPO where it provides you with surplus income In these circumstances a nil tax (or NT) IPA or IPO based on this additional income may be the only amount you have to pay, and the agreement or order will stop when your tax code changes. If you have other surplus income, the monthly amount paid under the IPA or IPO will reduce when your tax code changes.
In summary bankruptcy is not a punishment or something to be ashamed of, on the contrary it is a sanctuary for indebted individuals to avail of in order to deal with their creditors. Your bankruptcy will appear on a public register and will significantly affect your ability to obtain credit for a period of at least 6 years from the Bankruptcy Order.
There are several restrictions you have to observe whilst bankrupt, the main ones being that you cannot take credit of more than £500 without advising the lender that you are bankrupt, you cannot act as a company director, a Member of Parliament or a Justice of the Peace. If you are considering going bankrupt and you are a member of a professional body then it is important to check whether it will effect on your accreditation. Likewise, in certain jobs, going bankrupt can be contrary to the terms and conditions in your contract of employment. Make sure you check this to see if you would be affected.
Whilst the application forms are relatively easy to complete, you can always seek professional assistance to help you finalise matters properly and arrange for your attendance at Court.
MoneySave offers a Bankruptcy Assistance service through selected specialist partners. They will complete the forms on your behalf and you will have the chance to discuss your decision with an experience Insolvency Practitioner once your paperwork has been processed. Should you choose to progress with your bankruptcy then they will arrange your attendance at Court.
Fees for this Bankruptcy Assistance service range between £250 and £500, plus VAT. This is in addition to any Court fees that are applicable, which are:
- The Court Fee of £175
- The Official Receiver's Deposit of £525
For further information on Bankruptcy Assistance call the number above or complete the enquiry form.
Failure to adhere to the terms of a Debt Solution could result in increased financial problems. Most Debt Solutions will affect your credit rating, though it is our experience that those who approach us already have an impaired credit record. By entering into a managed Debt Solution, like a DMP or an IVA, you will be showing your creditors that you are taking a responsible attitude to resolving your financial problems and this could help you in the future. Fees may be payable to the Debt Solution provider depending on the solution that best suits your circumstances, which will be clearly explained and you have a right to a 14-day cooling off period.