Implications of and alternatives to bankruptcy
Around 40% of people living in the UK managed to reduce their debt in 2008, moneysupermarket.com revealed last summer.
It is the over 60s who have had the most success reducing their debts with a 55% reduction compared to 35% of people under 30 who have increased their debts. Research by the price comparison site shows that 54% of UK adults hold a non-mortgage debt, whilst 27% of people have taken on more debt in the past 12 months.
However, despite many people being able to reduce their out goings, the average debt for an adult still amounts to nearly £7,000. Depending on your particular circumstances and perspective on the future, the question is what do you do if you cannot despite your best endeavours at curbing and controlling your finances, pay off your debts, and you are left no apparent way forward?
Bankruptcy is an option that often has to be considered when an individual cannot pay their debts as they fall due. If you are ever faced with the prospect of bankruptcy, you should look at alternatives as soon as possible, get independent advice and form a strategy to move you and your family forward.
The Bankruptcy Proceedings
From a positive perspective being bankrupt clears your debts up until you were declared bankrupt, reduces pressure from creditors and allows you to keep certain assets such as a reasonable living allowance. After 12 months you will be free to make a fresh start, but there are real downsides – principally your financial options for the future as far as getting credit is concerned.
Anyone can go bankrupt, including individual members of a partnership. There are different insolvency procedures for dealing with companies and for partnerships themselves. When you are bankrupt, your non-essential assets (property and possessions) and excess income are used to pay off your creditors (those you owe money to). At the end of the bankruptcy period, most debts are ‘discharged’ (cancelled), regardless of how much you still owe. The bankruptcy period normally lasts for one year. Your discharge could happen earlier if you co-operate fully with the Official Receiver. However, in a small number of cases and if you have behaved irresponsibly, bankruptcy can last for much more than one year.
How are you made bankrupt?
A court can declare you bankrupt by issuing a ‘bankruptcy order’ after it has been presented with a ‘bankruptcy petition’. Bankruptcy petitions are usually presented in the High Court in London or at a county court near where you live or trade (although not all deal with bankruptcy petitions).
The court provides the bankruptcy order against an individual, although this is done at the request of either the individual or one of his/her creditors. It is done by presenting the court with a bankruptcy petition, who in turn issue a ‘bankruptcy order’. A bankruptcy petition can be filed in one of the following two ways:
• By you – Download a debtor’s petition from the Insolvency Service website (www.insolvency.gov.uk), or from your nearest county court – when completed, take it to your nearest county court with bankruptcy jurisdiction. A fee of £125 is payable but can be waived if you meet certain criteria. At the same time you must also pay a £345 fee for the Official Receiver’s work.
• By a creditor – A creditor can issue a creditor’s petition if you owe them an unsecured debt of more than £750. A bankruptcy order can still be made even if you refuse to acknowledge the proceedings or refuse to agree to them. That is why you should co-operate fully once the bankruptcy proceedings have begun. If you dispute the creditor’s claim, you should try and reach a settlement before the bankruptcy petition is due to be heard. Trying to do so after the bankruptcy order is made is expensive and difficult, and would involve paying court fees and solicitor’s fees – which might be more than the debt itself.
What happens to your assets?
Following bankruptcy, your finances, including your assets (things of financial value) come under the control of a Trustee, be it either an Official Receiver or an Insolvency Practitioner depending on your circumstances. The Official Receiver acts to protect your assets or as trustee of your bankruptcy if you have no assets, or if you do have assets, an Insolvency Practitioner will act for you and sell them in order to pay back your creditors. Whoever is appointed is responsible for finding out as much as possible about your assets and liabilities so as to pay off creditors. It is important to note that your creditors can no longer pursue you for payment directly or indirectly, as payment becomes the responsibility of the Trustee.
Nevertheless you are responsible for any debts or commitments which occurred after you became bankrupt. Bankruptcy draws a line in the sand and you have to continue paying rent for example and bills.
Once you are bankrupt, the Official Receiver, or appointed trustee, can sell your assets to pay your creditors. However, certain goods are not treated as assets for this purpose, for example:
• equipment you need for your work (e.g. tools or vehicles)
• household items needed by you and your family (e.g. clothing, bedding and furniture)
The Official Receiver can look at your income (taking into account expenses such as your mortgage, rent and household bills) and decide if payments should be made to your creditors. You may be asked to sign an ‘income payments agreement’ to pay fixed monthly instalments from your income for three years.
If you do not pay or refuse to sign such an agreement, the Official Receiver can apply for an income payments order from the court to order you to pay – running for at least three years from the date of the order.
What are the implications of bankruptcy?
As indicated by the role of the Trustee and the restricted role of the creditor, your control of your financial affairs is restricted and subject to the following obligations:-
• You must give the Official Receiver details of your finances, assets and creditors
• You must hand over your assets to the Official Receiver with the relevant paperwork, such as bank statements and insurance policies
• You must tell your trustee (either the Official Receiver or insolvency practitioner) about any new assets or income during your bankruptcy
• You must stop using credit cards and bank or building society accounts
• You must not obtain credit over £500 without telling the creditor that you’re bankrupt
• You must not make payments direct to your creditors (there are exceptions to this, such as mortgage arrears and outstanding child support payments)
The stigma attached to bankruptcy is undoubted and whilst it will give you a second chance to start over, it does mean that you are effectively barred from taking positions of trust or responsibility involving financial management, and you can always be called before the Court to explain why you are in debt.
You cannot act as a company director, or take any part in the promotion, formation or management of a limited company (LTD) without the permission of the court, and you cannot trade in any business under any other name unless you inform all persons concerned of the bankruptcy.
Being self employed therefore would be very difficult, especially with regards to getting credit which is difficult enough these days. Plus there are certain professions which you are restricted from entering, including practising as a Charted Accountant, Lawyer, Member of Parliament or Justice of the Peace (JP).
Alternatives to bankruptcy
A) Debt Relief Orders (From 6 April 2009)
Debt Relief Orders (DROs) provide debt relief, subject to some restrictions. They are suitable for people who do not own their own home, have little surplus income and assets and less than £15,000 of debt. An order lasts for 12 months. In that time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if your circumstances have not changed you will be freed from the debts that were included in your order. DRO’s do not involve the courts. They are run by The Insolvency Service in partnership with skilled debt advisers, called approved intermediaries, who will help you apply to The Insolvency Service for a DRO.
Is a DRO likely to be suitable for me?
To apply for a DRO, you must meet certain conditions:
• You must be unable to pay your debts.
• You must owe less than £15,000.
• You can own a car to the value of £1000 but the total value of other assets must not exceed £300.
• After taking away tax, national insurance contributions and normal household expenses, your disposable income must be no more than £50 a month.
• You must be living in England or Wales, or at some time in the last 3 years have been living or carrying on business in England or Wales.
• You must not have been subject to another DRO within the last 6 years.
• You must not be involved in another formal insolvency procedure at the time you apply.
If you still have any queries regarding DROs you can call The Insolvency Service Enquiry Line on 0845 602 9848, or refer to their website.
B) An informal arrangement or “family arrangement”
If you know that you cannot pay all your debts, you could consider writing to your individual creditors to see if you can reach some compromise, a realistic and attainable timetable as to how much you can repay them and over what period of time. The disadvantage with an informal arrangement is that it is not legally binding so your creditors could ignore it later and ask you to pay in full.
C) Administration orders
If one or more of your creditors has obtained a court judgment against you, the county court may make an administration order. This is a court-based procedure whereby you make regular payments to the court to pay towards what you owe your creditors. Your total debts must not be more than £5,000 and you will need enough regular income to make weekly or monthly repayments. You do not have to pay a fee for an administration order but the court will take a small percentage from the money you pay towards its costs. If you do not pay regularly, the order could be cancelled and you may become subject to the same restrictions as someone who is bankrupt. If your circumstances change and you cannot pay as ordered, you can apply to the court to change the order. The court which made the order will tell you what to do. Details of administration orders are available at your local county court.
D) Individual voluntary arrangements
An individual voluntary arrangement (IVA) starts with a formal proposal to your creditors to pay part or all of your debts. You need to apply to the court and you must be helped by an insolvency practitioner. Any agreement reached with your creditors will be binding on them.
First of all you must find an authorised insolvency practitioner prepared to act for you from your local court or at your local Official Receiver’s office. Next you apply to the court for an „interim order”. This prevents your creditors from presenting, or proceeding with a bankruptcy petition against you while the interim order is in force.
It also prevents them from taking other action against you during the same period without the permission of the court. The insolvency practitioner tells the court the details of your proposal and whether in his or her opinion a meeting of creditors should be called to consider it.
If a meeting is to be held, the date of the meeting and details of the proposals are sent to your creditors. Only those creditors who had notice of the meeting are bound by the arrangement, so it is important that you have accurate records of all your creditors’ names and addresses. Otherwise, the arrangement might fail because the practitioner cannot contact all the creditors and, therefore, bind them to it.
At the meeting, the creditors vote on whether to accept your proposals. If enough creditors (over 75% in value of the creditors present in person or by proxy, and voting on the resolution) vote in favour, the proposals are accepted. They are then binding on all creditors who had notice of, and were entitled to vote at the meeting. The insolvency practitioner supervises the arrangement and pays the creditors in accordance with the accepted proposal.
What will an individual voluntary arrangement cost?
You should ask several practitioners what they charge before you ask any of them to act for you. Insolvency practitioners are usually accountants, some are solicitors and their fees are similar to those charged by members of these professions for other kinds of work.
When can you make an individual voluntary arrangement?
It is better and cheaper for you to set up an individual voluntary arrangement before you become bankrupt but you can propose one afterwards. If you do propose an individual voluntary arrangement after bankruptcy, it is possible for you to nominate the Official Receiver to be the supervisor of the arrangement. This type of arrangement is called a fast-track voluntary arrangement and is only suitable in certain cases.
Are there any restrictions?
The court cannot make an interim order if you have applied for one in the previous 12 months. There is no maximum or minimum level of debt and no maximum or minimum level of repayments, except what is acceptable to your creditors. An arrangement might particularly suit you if:
• you have friends or relatives prepared to help pay or contribute towards paying your debts;
• your income enables you to pay regular sums to creditors.
What are the advantages of an individual voluntary arrangement compared to going bankrupt?
• It gives you more say in how your assets are dealt with and how payments are made to creditors. You may be able to persuade your creditors to allow you to retain certain assets (such as your home). You will obviously have to act responsibly and flexibly in order to reach agreement with your creditors.
• You avoid the restrictions which apply to a bankrupt
• Because you will not have to pay some of the fees and expenses which are charged in a bankruptcy, the overall costs are likely to be less.
Can an individual voluntary arrangement be proposed by a member of a partnership?
Yes. You can propose an individual voluntary arrangement on your own which must take into account the claims that the creditors of the partnership have against you personally. It will not affect the rights of the partnership creditors to take action against the partnership itself or against any other partner. Alternatively, you and your partner(s) may wish to propose an arrangement involving the partnership creditors and the personal creditors of the partners. This can be done in two ways:
a) the partners may propose interlocking voluntary arrangements, with each partner making proposals for their own debts and the debts of the partnership; or
b) the partnership may propose a partnership voluntary arrangement (usually accompanied by voluntary arrangements for each partner).
An authorised insolvency practitioner must help you to make proposals to creditors, but if you enter a voluntary arrangement and fail to give full details of your assets and debts or fail to do what you have agreed under the arrangement, then the insolvency practitioner, or any creditor bound by it, may still petition for your bankruptcy.
Where to get help and advice
Clearly before you take any action to apply for your own bankruptcy, you should get your own legal or financial advice about bankruptcy and the other options available to you. It is not the role of The Insolvency Service and the courts cannot advise you on specific insolvency problems; for example, whether you should go bankrupt or your company should go into liquidation, or whether you should look at alternatives. You should get independent advice.
You may consult a solicitor, a qualified accountant, an authorised insolvency practitioner or a reputable financial advisor, or there are certain reputable organisations such as the Citizens Advice Bureau (http://www.citizensadvice.org.uk/contact_us.htm), National Debtline (0808 8084 000 between 9.00 am and 9.00 pm from Monday to Friday and from 9.30 am to 1.00 pm on Saturdays), and Consumer Credit Counselling Service (CCCS) on 0800 138 1111.
By Cartwright Adams Solicitors