Bankruptcy.

It’s a word we all know. In fact, it’s a word we’ve probably all used in conversation before. Most of us know it’s connected to debt and our ability to keep on top of our bills.

But there are a lot of myths and misconceptions around bankruptcy (and it doesn’t help that the word has been co-opted into phrases with very negative meanings, for example, “morally bankrupt”.)

Subsequently, there is a lot of bad advice out there for people facing the prospect of bankruptcy or struggling with their debts. We want to make sure that everyone – from business owners to individuals to the professionals advising them – understands what bankruptcy is, what it means for a person, and what their options are.

What is bankruptcy?

It’s most commonly a tool used by creditors (the people a person owes money to) in order to get back the money they are owed. The creditor will ask the court to make the person bankrupt in order to recover the outstanding debt.

You may also have heard the term “filing for bankruptcy”. If someone cannot pay your debts, they can apply to make themself bankrupt, however we would always recommend exhausting all other options first; it should be a last resort.

Once an individual is made bankrupt, all their creditors must be treated equally and dealt with under the bankruptcy. This includes credit cards and loans – but not their mortgage, so they must keep those payments up to date.

What happens next?

The individual will be known as bankrupt for one year, after which they may be released from bankruptcy. During the bankruptcy, they will no longer control their assets, ie. any possessions of a monetary value which they own.

There are exceptions. They can keep the following unless their individual value is more than the cost of a reasonable replacement:

• Tools, books, vehicles and other items of equipment which they need to use personally in their employment, business or vocation.
• Clothing, bedding, furniture, household equipment and other basic items they and their family need in the home.
  The individual discloses everything they own to the Official Receiver (the Insolvency Service) who will decide what they can keep.

The Official Receiver then takes control of all their other assets. They – or any insolvency practitioner appointed as trustee – will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and then pay the creditors, as well as the insolvency practitioner’s fees if appointed.

If the person is a homeowner, their interest in (in other words, their ‘share’ of) the property becomes an asset within the bankruptcy, so it may need to be sold. If they have a dependent family member living with them, it may be possible to delay the sale until after the first year of the bankruptcy, to give time to make other arrangements. It is also possible for the person’s partner (or another family member) to buy their interest in the property, and this would prevent it from being sold.

If the trustee can’t sell the property, they may get a charging order on the person’s interest in it (if it’s worth more than £1000). A charging order means the individual’s ‘share’ of the house is back in their possession – but whatever that share is worth, they must pay that back out of the proceeds whenever that property is sold.

Until it’s sold or a charging order obtained, the trustee owns that interest in the person’s home, but only for a certain amount of time, usually three years, and will include any increase in its value. Therefore, the benefit of any increase in value will go to the trustee to pay the debts, even if the home is sold some time after they have been discharged from bankruptcy. The increase in value over that time period does not belong to the individual.

After three years, the person’s interest in the property may be returned to them, if:

• The trustee hasn’t sold or obtained a charge over the interest in the property
• The trustee hasn’t applied for an order of possession
• The trustee hasn’t come to an arrangement with the person about the interest in the property

What are the options?

It is possible to apply to have a bankruptcy annulled – so it would be like it never happened. In order to do this, the individual would need to either repay their debt in full or put a better offer to their creditors than would be available in a bankruptcy, as well as covering statutory costs such as Official Receiver’s costs, Petitioning Creditor’s costs, legal costs in obtaining the Bankruptcy Annulment Order, in addition to the professional fees of an Insolvency Practitioner to administer this.

We would recommend this is done through an Insolvency Procedure called an Individual Voluntary Arrangement (IVA). An IVA is an alternative to bankruptcy and is a private contract between an individual and their creditors in which they promise to pay money due to them over a period of time. It is overseen by an Insolvency Practitioner firm like us.

As always, our advice is to deal with debt problems as early as possible. Before a creditor can apply to have someone made bankrupt, they must demonstrate they have tried all other avenues to recover their debt; this can include things like statutory demands.

So, if you or a client of yours is struggling (or appears to be) – we are always happy to chat on the phone or over email and offer some recommendations. There is always a way out and our initial advice is always free. Give us a call today on 0800 0465 029.

Got an idea for a business or personal finance, cashflow or insolvency issue we could tackle on the blog? Get in touch! Drop a line to info@jtmaxwell.co.uk or join the conversation over on our Facebook, Twitter, Instagram or Linked In.