Guide to bankruptcy

08 August 2018

What is bankruptcy?

Although bankruptcy is the best-known form of the three types of personal insolvency, it is actually the least common. In 2017, out of 99,219 personal insolvencies, there were just 15,105 bankruptcies, but 24,894 Debt Relief Orders and 59,220 Individual Voluntary Arrangements. Out of the three procedures, bankruptcy could be seen as the ‘toughest’ for the indebted individual, although it is a valuable debt relief tool in the right circumstances.

For a bankruptcy order to be made, it has to be shown that an individual is insolvent. That is, their debts outweigh their assets, or they cannot pay a debt when it is due.

Following a court order or an adjudicator decision to declare an insolvent person to be bankrupt, the person’s affairs are administered by a trustee, in the interest of creditors. The person’s assets are ‘realised’ (i.e. distributed or sold) to raise money to repay their creditors in a legally prescribed order of priority. Having been made bankrupt, an individual is subject to certain restrictions, such as not being able to act as a company director. These restrictions last until they are ‘discharged’ from bankruptcy, which usually happens after one year. At this point, the person is considered ‘debt free’, although their trustee will often continue to remain in office in order to realise any remaining bankruptcy assets, make dividend payments to creditors and to fully investigate the bankrupt’s affairs and business dealings.

Who can petition for bankruptcy?

There are two ways someone can be declared bankrupt:

• A self-application – The insolvent person applies online to make themselves bankrupt; there is no minimum or maximum level of debt that has to be owed before bankruptcy can be considered. The application is considered by an adjudicator.
• A creditor petition – A person or organisation owed £5,000 or more by the insolvent person can apply for a court order to have that person made bankrupt.

Self-application

Self-application must be done online, via the gov.uk website. The process costs £680, which must be paid in full before an application can be submitted. The payment can be made in instalments, but the process won’t begin until all payments are received. If the person applying for bankruptcy decides not to continue the process, any money they have already paid is returned to them. There is no time limit for payments. Around 70-80% of bankruptcies are through self-application.

Applications are looked over by an adjudicator working for the Insolvency Service, a government department. The adjudicator decides whether or not the person applying should be made bankrupt. It is a criminal offence to make false statements on the application form.

Indebted people whose debts and assets meet the threshold levels for a DRO (debts of up to £20,000 and assets of below £1,000, with some exempted assets), or who may be better suited to an IVA (if, for example, they owe more than around £10,000 to two or more creditors, and much of their debt is credit card or another type of consumer debt), are advised to consider those options, as they have less stringent requirements and implications than bankruptcy. In every case, R3 strongly recommends that anyone considering any form of personal insolvency talk to a professional advisor to determine which option best suits their personal and financial circumstances.

Creditor petition

In around 20-30% of bankruptcies, it is a creditor petition which leads to a bankruptcy order. This can only happen when the amount owed to a creditor or creditors jointly is £5,000 or more. Additionally, if someone has broken the terms of an IVA, or if they gave false information when applying for their IVA, they can be made bankrupt. These petitions are made to, and decided on by, the Court.

People who do not agree that they ought to be made bankrupt can give notice of their opposition to the bankruptcy order, via a form which must be submitted at least five days before their scheduled bankruptcy court hearing.

What happens during a bankruptcy?

• The person who has been declared bankrupt (by the adjudicator or by a court) receives a copy of the bankruptcy order. 
• The bankrupt person is sent an information pack, and might be asked for further details about their financial situation (either through a phone or face-to-face interview, by filling in a questionnaire, or by sending more information about their assets, income, debts and creditors). 
• They may be interviewed about their situation (sources of income, assets, life circumstances) by their trustee or the trustee’s staff so that the trustee can get a fuller picture about the person’s finances and assets, and so the trustee can get an initial idea of the amount that can be returned to their creditors. If an application is especially complicated, or if there is a suspicion that the bankrupt person is not telling the whole truth about their assets and income, an interview is more likely to take place. 
• All bankruptcy cases are initially held by the Official Receiver, a department within the Insolvency Service, which is appointed to act as the bankrupt person’s trustee. In some cases, the bankruptcy is handed over to an insolvency practitioner to act as trustee. Usually this happens in more complicated cases where the failure of the bankrupt person’s company is involved, where the person has significant or complex assets and debts, or where creditors believe the bankrupt person has not been honest about their asset levels. 
• The bankrupt person’s name and details are published in the Individual Insolvency Register and the London Gazette, although if they are deemed to be at risk of violence as a result of their details being made public, they can apply for a person at risk of violence (PARV) order to keep their address from being printed. 
• The bankrupt person’s assets are realised and distributed for the benefit of creditors. As part of this process, the trustee takes ownership of the bankrupt person’s belongings and sells them, then uses the funds gained as a result to repay creditors. 
• After a year (in the vast majority of cases), the bankruptcy period ends and the individual is ‘discharged’. The formerly bankrupt person may still subject to certain restrictions, however, and it may take more than a year for the bankrupt person’s assets to be realised.

What is the trustee in bankruptcy’s role?

The trustee in bankruptcy’s role is to try and get the best possible outcome for creditors. They are also an officer of the court, which gives them special legal powers, which they can use to investigate a bankrupt person’s affairs if they need to, as well as responsibilities to uphold.

In all bankruptcy cases, either self-applications or creditor petitions, the Official Receiver is automatically appointed as trustee. However, if creditors holding 25% or more of the debts owed by the bankrupt person wish to appoint an insolvency practitioner to be the trustee, they have the right to apply to do so.

The trustee’s fees are paid for out of the bankrupt person’s assets, and are fixed if the Official Receiver is the trustee, and agreed by creditors if an insolvency practitioner is appointed.

If an insolvency practitioner is appointed as the trustee, it is usually because creditors believe that engaging the services of an insolvency practitioner will enhance the level of debts which can be recovered (insolvency practitioners have wide powers of investigation and recovery).

What happens to a bankrupt person’s assets?

After a bankrupt person’s assets have been handed to their trustee, they may be sold to repay creditors.

The bankrupt person is allowed to keep anything they need for their job, and household items, including furniture and clothes.

Cars can be kept if they are essential (for example, if the bankrupt person or someone in the household needs the car to get to school or work, or if they are disabled), but if they are wholly owned by the bankrupt person and are worth over around £1,500, the trustee may require the car to be sold, and a replacement purchased for £1,000. If the car has been purchased on finance (such as hire purchase or a personal contract purchase), the trustee may allow the bankrupt person to keep making payments to retain use of the car if it is deemed essential.

If the bankrupt person owns outright or has equity above £1,000 in their home, the trustee will usually require the property to be sold, and the bankrupt person to find alternative accommodation. This applies to properties which are jointly owned; the share in the property due to the bankrupt person will go to their creditors. The trustee has three years from the date of the bankruptcy order to deal with the family home; after that period, if no action has been taken by the trustee, ownership of the bankrupt person’s share of the property is handed back to them and becomes unavailable to creditors.

The bankrupt person may be required to make a contribution from their income for a period of up to three years if the trustee considers they have surplus income, via an income payments order or an income payments agreement.

Action can also be taken by the trustee to recover assets which have been given away prior to bankruptcy in order to put them out of reach of creditors – for example, if a person signed over their share in a property to a spouse or family member prior to applying to become bankrupt.

What restrictions are there on a bankrupt person?

During the period of their bankruptcy, a bankrupt person is restricted from certain jobs and activities. These include:

• Being the director of a limited company
• Running a company, without a court’s permission
• Borrowing more than £500 without telling the lender that you are bankrupt
• Holding some jobs, such as insolvency practitioner, MOT authorised examiner, charity trustee, registrar, and consumer credit licence holder
• Holding lasting power of attorney for another person
• Using a different business name, if self-employed, without telling all customers about their bankruptcy.

Some private organisations – such as golf clubs – may have their own rules which bar individuals subject to a bankruptcy order from membership.

Can bankruptcy be extended?

Yes: If the bankrupt person is found to have been dishonest (by hiding assets from their trustee, for example, or breaking the terms of their bankruptcy agreement), their trustee can apply to a court for a Bankruptcy Restriction Order. These can be granted for lengths of up to 15 years. People subject to bankruptcy restrictions are barred from being local or national politicians, magistrates, and school governors, in addition to the standard bankruptcy restrictions (see above).

What happens after a bankruptcy has been discharged?

When a person is discharged from bankruptcy, their debts (excluding student loans, fraudulent debts and criminal fines) are written off and they are freed from the restrictions which have been placed on them. Three months after this, their details are removed from the Individual Insolvency Register.

Six years after bankruptcy, the details are removed from the formerly bankrupt person’s credit file, although their details will still be recorded in the Gazette and can be found there. However, when credit-checking, lenders do not look for this information.

Note: The description of bankruptcy above applies to England & Wales; personal insolvency procedures differ in Scotland.