Bankruptcy costs explained

25 September 2018

Bankruptcy and other personal insolvency procedures play an important role within the economy. They are designed to help return money to creditors when people can no longer pay their debts, and to help people have a financial fresh start after problem debt.

There are a number of different personal insolvency procedures, each of which is suited to different situations. To improve the chances of people with problem debts ending up in a debt solution which is appropriate to their circumstances, it’s really important that people with problem debts seek advice about their finances – and are given a chance to do so. The earlier someone seeks advice, the more options they will have. There are lots of sources of advice available, from insolvency practitioners through to debt charities.

Bankruptcy can be a particularly serious and complex form of personal insolvency. It also operates slightly differently to other forms of insolvency in that individuals can be put into the procedure by the court following a creditor’s petition. In bankruptcy, an insolvency practitioner will be acting as an officer of the court and will be tasked with maximising returns to an individual’s creditors. To do this, the insolvency practitioner is made responsible for all of an individual’s assets and can sell these to raise money for creditors. Part of the process is identifying the assets an individual has in the first place. The bankruptcy process can therefore involve investigations, court applications, and asset sales.

The insolvency practitioner will always seek the indebted person’s cooperation in carrying out their duties, as this makes the bankruptcy process much quicker.

It’s very rare for costs to escalate from small debts. When this does happen, it might be because extra investigation work is required or because the insolvency practitioner has had to ask the courts or lawyers for help so that they can exercise their powers and fulfil their duties. Costs can also increase where the bankrupt person does not cooperate, either intentionally or because they perhaps find it difficult to engage with the process.

The costs of the bankruptcy process don’t just include the insolvency practitioner’s time. For example, the Government charges a number of fees, including a £6,000 fee, in every bankruptcy case, even where the bankruptcy is annulled. Legal and investigatory costs must be paid for, too.

What protections are there for the person who has been made bankrupt? 

There is a well-established and strict framework of insolvency regulation, and the profession takes accountability for the costs of insolvency processes very seriously. An insolvency practitioner’s appointment and their fees must be approved by creditors, while insolvency practitioners must explain and justify their fees and costs in regular reports. Regulators can – and do – take action against insolvency practitioners who fail to do this.

Anyone with a complaint about an insolvency practitioner’s conduct – including the person in debt – should refer the insolvency practitioner to the Government’s Insolvency Complaints Gateway. Bankrupt individuals are also able to challenge an insolvency practitioner’s conduct in the courts, and if their assets are sufficient to pay the costs and claims of the bankruptcy in full, the bankrupt can ask the Court to review the appropriateness of the Trustee’s fees.

Indebtedness can be a difficult and stressful situation for people to find themselves in, and insolvency practitioners are sensitive to this. The profession is very alert to ‘vulnerable’ people and will have processes in place to make sure they get the right support.

An individual can only be made bankrupt by their creditors once a court has assessed the case, which offers an element of protection to the person being made bankrupt.

How is the ‘trustee’ chosen?

Bankruptcy cases will either be handled by an insolvency practitioner or the Government’s Official Receiver, which will charge its own fees.

All cases automatically start with the Official Receiver, but an individual’s creditors can ask for an insolvency practitioner to be appointed instead. At creditors’ request, insolvency practitioners will take on cases of all sizes. The costs of each case depend on the exact circumstances of the bankruptcy.

Unlike the Official Receiver, insolvency practitioners are independently regulated and their fees are approved by creditors.

What can be changed?

Although it’s rare for costs to escalate from small debts in a bankruptcy, R3 has always supported efforts to avoid this sort of situation from developing.

For example, we have long campaigned for the introduction of a ‘Breathing Space’ from creditor enforcement for indebted individuals. This process would enable an individual to get advice about their situation in a relatively pressure-free environment, and would increase the chances of people ending up in a debt solution which is most appropriate for their situation. A ‘Breathing Space’ could give people facing a bankruptcy petition the chance to enter an alternative insolvency procedure instead. We’re pleased that the Government has plans to introduce this ‘Breathing Space’ within the next few years.

We have also successfully campaigned to increase the threshold for being made bankrupt. Until 2015, people could be made bankrupt if they owed just £750 to one creditor. We felt this was unfair and campaigned to have the threshold raised. You must now owe £5,000 to one creditor before you can be made bankrupt. This change will have reduced the number of bankruptcy cases involving very low value debts.

Ultimately, it’s really important that people in financial difficulties seek advice from a qualified, regulated advisor at the earliest possible opportunity – there are lots of places where this advice can be sought for free. Advice will help indebted individuals understand the options open to them, and could help them find an alternative to being made bankrupt by their creditors. A Debt Relief Order, for example, is an insolvency procedure for people with under £20,000 of debt and less than £1,000 in assets. The Government also has an important role to play in educating people facing insolvency about how the different insolvency procedures work.

What are the statistics on complaints about fees?

Complaints around insolvency practitioners’ fees are very rare. In 2017, there were 757 complaints to the Government about insolvency practitioners – of these, 308 (41%) were referred to the regulators. Less than 1% of the complaints referred to the regulators related to insolvency practitioner fees. Between them, insolvency practitioners and the Official Receiver handled 100,000 personal insolvency cases in 2017, and 15,000 corporate insolvencies.