Bankruptcy relieves a debtor of all virtually all their debts. But, it places control of their assets in another's hands, has onerous restrictions, and damages prospects of obtaining mortgages or other credit in the future.
Further information and good advice can be obtained from the Government website. Though, if your debts are large, you have significant assets or your situation is complicated, you may wish to seek the advice of a Licensed Insolvency Practitioner (like Hodgsons).
Bankruptcy (where an individual becomes formally insolvent) has two aims:
- To free the debtor from the pressures of creditors and so enable him or her to make a fresh start.
- To ensure that all assets available are distributed fairly among the creditors.
The court is responsible for making a Bankruptcy Order against an individual, although this is done at the request of either the individual or one of his/her creditors. Once the Order is granted, it must be advertised in a publication known as The London Gazette.
The debtor's assets then fall under the control of a Trustee, either the Official Receiver (a civil servant and officer of the court), or a Licensed Insolvency Practitioner, who may be appointed by either the Official Receiver or the creditors. Whoever is appointed becomes responsible for uncovering as much as possible about the debtor's assets and liabilities and then maximising returns for the creditors from the assets available, within certain guidelines.
At this point, the debtor can no longer be pursued by creditors for payment of his or her debts; dividend payments to creditors become the responsibility of the Trustee.
Bankruptcy: Costs and Constraints
Bankruptcy costs can be considerable and are one of the disadvantages of Bankruptcy proceedings. These costs are always paid first from asset realisations. A large proportion of the value of assets can be taken up in fees and costs, depending on the amounts involved.
All assets belonging to the debtor, including his or her home, come under the control of the Trustee. Where the home is co-owned, the debtor's interest can still be realised. In this situation a period of twelve months is allowed before the disposal of the property if it is occupied by a co-owner, family or dependents of the debtor. At the end of the twelve month period, the property will almost certainly have to be put up for sale, enforced by a court order if necessary. It may be possible for an offer to be made to the Trustee by the co-owner, family or a friend of the debtor if they are able to raise the funds to pay for the value of the debtor’s interest in the property.
The other main disadvantages of Bankruptcy are the constraints forced upon the Bankrupt and the stigma of having to declare oneself as a Bankrupt.
The following are criminal offences for an undischarged Bankrupt:
- Obtaining credit of £500 or more, either alone or jointly with another person, without disclosing your bankruptcy.
- Forming or managing a limited company or acting as a company director without the court's permission.
- A bankrupt may not hold certain public offices. For example, they may not act as a magistrate or an MP.
- Some professionals are prevented from practising if made Bankrupt, including a Chartered Accountant or a Solicitor.
- Credit ratings may be affected for a number of years to come.
- Bankrupts cannot be a trustee of a charity or a pension fund.
- When opening a new bank account the debtor must advise that they are Bankrupt and conditions may be imposed.
When a Bankrupt is discharged these constraints end.
Discharge from Bankruptcy
When a bankrupt is discharged, they are freed from the restrictions imposed on them during their Bankruptcy. Despite this, the Trustee or Official Receiver can apply to court for a Bankruptcy Restrictions Order which would mean that some restrictions continue to be placed on the debtor, even though the debts have been discharged.
Automatic discharge will happen 12 months after the Bankruptcy started. If the debtor has not co-operated fully, or if further investigation is required, the court may be asked to stop the discharge process until the Official Receiver is satisfied that everything had been concluded.
After discharge, the debtor can obtain a certificate of discharge by writing to the court that dealt with their Bankruptcy and asking for one to be provided. A fee of £60 is payable.
Once a Bankrupt has been discharged they will be free from most of the debts that they owed prior to the Bankruptcy.
Some debts are not included in Bankruptcy and will still be owed after the discharge has been obtained. These include:
- Debts owed under family court proceedings.
- Money owed under personal injury claims taken against you unless the court directs otherwise.
- Court fines.
- Debts arising from fraud or certain other crimes.
- Student loan debts.
Any assets that formed part of the Bankruptcy estate and which were claimed by the Trustee will not be returned to the Bankrupt. These assets will be realised to pay your creditors. In the (usually unlikely) event that there is a surplus once the creditors have been paid, including statutory interest, and the costs and expenses of the Bankruptcy have been paid, this will be returned to you.
Your Trustee may take some time to realise the assets. It is usual that if a debtor's interest in any equity in their home is not realised within 3 years of the Bankruptcy Order, that this will be returned to the debtor. However, there are exceptions to this, and the debtor should seek independent advice to discuss this in more detail.