personal insolvency advice

Personal Insolvency Law and Procedure

The law governing personal insolvency in England, Wales and N Ireland, and the procedures involved, are enshrined within the Insolvency Act 1986; The Enterprise Act 2002 and various rules issued by the insolvency governing body known as Statements of Insolvency Practice (SIP). There are also a great number of “custom and practice” rules built up over the years through individual insolvency cases.

Perhaps the highest form of personal insolvency in the UK is an application for bankruptcy. Even the Bankruptcy Court, when presented with a petition for bankruptcy, is obliged to see if there are any other measures an individual can use to avoid the bankruptcy. However if, in the final analysis, a personal bankruptcy is unavoidable then it is worthwhile reviewing the elements which have recently accounted for a record number of bankruptcies in the UK (more than 63,000 in 2006 – the highest since records began)

Many debtors approach Personal Insolvency.org to ask questions along the following lines-:

What is bankruptcy?
How are you made bankrupt?
Where is the bankruptcy Order made?
Who will deal with your case?
What are your duties as a bankrupt?
How will bankruptcy legally affect you?
What are the restrictions on a bankrupt?
Becoming free from bankruptcy
Bankruptcy Restriction Orders and Undertakings

What is personal bankruptcy?

Personal bankruptcy is the ultimate way of dealing with unsecured debts that you cannot afford to repay. Bankruptcy proceedings are designed to:

  • Free you from overwhelming debts so you can make a fresh start, subject to some restrictions; and
  • Ensure your major personal assets are shared out fairly among your creditors.

Any individual can apply for bankruptcy, including individual members of a partnership.

There are different insolvency procedures for dealing with companies and for partnerships themselves which are not covered by this analysis.

How is an individual made bankrupt?

A County Court can make a bankruptcy order only after a bankruptcy petition has been presented. It is usually presented either:

  • by yourself (debtor’s petition); or
  • by one or more creditors who are owed at least £750 by you and that amount is unsecured (creditor’s petition).
A bankruptcy order can still be made even if you refuse to acknowledge the proceedings or refuse to agree to them. You should therefore 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 has been made is both difficult and expensive.


Where is the bankruptcy order made?


Bankruptcy petitions are usually presented at the High Court in London or at a county court near to where you trade or live. A petition can be presented against you even if you are not present in England or Wales at that time. This can happen when you normally live in, or within the previous 3 years have had residential or business connections with, England or Wales.
Sometimes government departments start bankruptcy proceedings in the High Court in London or in one of the District Registries. If you did not trade or do not live in the London area, your case will usually be transferred to the appropriate local county court and, if a bankruptcy order is made, it will be dealt with by the local Official Receiver.

Once the bankruptcy order has been made, it is advertised in “The London Gazette” (an official publication which contains legal notices) and in a local or national newspaper (or both). In addition the Official Receiver will give written notice of the order to a number of organisations.


Who will deal with your case?


a. The Official Receiver

An Official Receiver is appointed by the Secretary of State and is an officer of the court. The Official Receiver has responsibility for administering your bankruptcy and protecting your assets from the date of the bankruptcy order. He or she will also act as trustee of your bankruptcy estate unless an insolvency practitioner is appointed.

The Official Receiver is also responsible for looking into your financial affairs for the period before and during your bankruptcy. He or she may report to the court and has to report to your creditors. The Official Receiver must also report any matters which indicate that you may have committed criminal offences in connection with your bankruptcy or that your behaviour has been dishonest or you have been in some way to blame for your bankruptcy.

The Official Receiver will give notice of the bankruptcy order to local authorities, utility suppliers, courts, sheriffs, bailiffs, National Savings and Investments (premium bonds), the Land Registry and any relevant professional bodies. Enquiries will also be made of banks; building societies; mortgage, pension and insurance companies; solicitors, landlords and any other persons or organisations who may be able to provide details of any assets or liabilities that you have, or have had, an interest in (either on your own or jointly with others). Third parties will also be asked about any other matters relating to your bankruptcy.

b. An insolvency practitioner

Insolvency practitioners are individuals who specialise in insolvency work. An insolvency practitioner, who must be authorised by either the Department of Trade and Industry or the appropriate professional body, can be appointed trustee instead of the Official Receiver. He or she is then responsible for disposing of your assets and making payments to your creditors.

What are your duties as a bankrupt?

When a bankruptcy order has been made, you must:
a)Comply with the Official Receiver’s request to provide information about your financial affairs. The Official Receiver may request that you attend at his or her office for an interview – the Court will give you the address of the Official Receiver. (Note: usually before the interview, you will be sent or given a questionnaire which you should fill in as fully and accurately as possible.) If the Official Receiver does not ask that you attend at the office for an interview, you will be sent a letter which will set out what is required of you. Again it is likely that you will be asked to complete a questionnaire. You should note that in either circumstance, any questionnaire completed before the bankruptcy order, supplied to you by an adviser or another third party, will not be acceptable;

b)Give the Official Receiver a full list of your assets and details of what you owe and to whom (your creditors);

c)Look after and then hand over your assets to the Official Receiver together with all your books, records, bank statements, insurance policies and other papers relating to your property and financial affairs;

d)Tell your trustee about assets and increases in income you obtain during your bankruptcy. (Note: by law you must inform your trustee of any property which becomes yours during the bankruptcy. Such property includes lump sum cash payments that you may receive, for example redundancy payments, property or money left in a will);

e)Stop using your bank, building society, credit card and similar accounts straightaway;

f)Not obtain credit of £500 or more from any person without first disclosing the fact that you are bankrupt;

g)Not make payments direct to your creditors.

h)You may also have to go to court and explain why you are in debt. If you do not co-operate, you could be arrested;

i)Your books and papers will normally be destroyed after your trustee has finished with them. However, you can have them back, provided they have not already been destroyed, if the court annuls your bankruptcy.

How will bankruptcy legally affect you?

a. In relation to your creditors
If you are made bankrupt, you must not make payments direct to creditors. Creditors to whom you owe money when you are made bankrupt make a claim to your trustee (that is, either the Official Receiver or an insolvency practitioner). They should not ask you directly for payment; if you receive any requests, pass them immediately to your trustee to deal with and tell the creditor that you are bankrupt. There are some very limited exceptions to this non-payment rule.

The main ones are:
a) secured creditors, such as creditors who have a mortgage or charge on your home Note: If mortgage payments are not made, the lender may sell your home.
b) non-provable debts, such as court fines and other obligations arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991. Non-provable debts are not included in the bankruptcy
proceedings and you are still responsible for paying off such debts; and
c) benefit overpayments, where the Department for Work and Pensions (DWP) can recover any benefit overpayments from any further benefits you receive.
d) Student loans, since 1 September 2004 all outstanding student loans cannot be claimed in bankruptcy. They remain the responsibility of the (former) student to repay within the terms of the loan arrangement.
e) If you were made bankrupt before 1 September 2004 you may still have to repay your student loan. Clarification should be requested from the Official Receiver who is dealing with your affairs.
f) Suppliers of services to your home (gas, electricity, water and telephone) may not demand from you payment of bills in your name which are unpaid at the date of the bankruptcy order. But they may ask you for a deposit towards payment for further supplies or could arrange for the accounts to be transferred into the name of your spouse or partner. You must pay continuing commitments such as rent (if you rent your home), together with any debts you incur after the bankruptcy.

b. Payment to creditors
The Official Receiver will tell your creditors that you are bankrupt. He or she may either act as the trustee or may arrange a meeting of creditors for them to choose an insolvency practitioner to be the trustee. This happens if you appear to have significant assets. You may have to go to this (or any other) meeting of your creditors.

The trustee will tell the creditors how much money will be shared out in the bankruptcy. Creditors then have to make their formal claims. The costs of the bankruptcy proceedings are paid first from the money that is available. The costs include fees that the Official Receiver or the insolvency practitioner charges for administering your case.

At least part of the claims from your employees (if any) may be preferential and are paid next, along with any other preferential debts. Finally, other creditors are paid, together with interest on all debts, as far as there are funds available from the sale of your assets. If there is a surplus, it will be returned to you. You would then be able to apply to the court to have your bankruptcy ‘annulled’ (cancelled).

When your trustee makes a payment to your creditors, he may place an advertisement about your bankruptcy in a newspaper asking creditors to submit their claims. Depending on how long it takes your trustee to deal with your assets, this advertisement may appear several years after the bankruptcy order.

c. Your personal assets
You will no longer control your assets.

  • You can keep the following items unless their individual value is more than the cost of a reasonable replacement:
    tools, books, vehicles and other items of equipment which you need to use personally in your employment, business or vocation;
  • clothing, bedding, furniture, household equipment and other basic items you and your family need in the home.
  • All these items must be disclosed to the Official Receiver who will then decide whether you can keep them.

The Official Receiver/trustee will take control of all your other assets on the making of the bankruptcy order. He or she, or any insolvency practitioner who is appointed as trustee, will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and then your creditors. If appointed, the insolvency practitioner’s fees for acting a trustee are also paid from the money raised by selling your assets.

The trustee may apply to the court for an order restoring property to him or her if you disposed of it in a way which was unfair to your creditors (for example, if before bankruptcy you had transferred property to a relative for less than its worth). The trustee may claim property which you obtain or which passes to you (for example, under a will) while you are bankrupt.

A student loan made before or after the start of a student's bankruptcy is not regarded as an asset that the trustee may claim, if a balance of the loan remains payable.

If you have made a claim against another person through court proceedings, or you think you may have a claim (a right of action) against another person, the claim may be an asset in the bankruptcy.

d. What happens to your home
If you own your home, whether freehold or leasehold, solely or jointly, mortgaged or otherwise, your interest in the home will form part of your estate which will be dealt with by your trustee. The home may have to be sold to go towards paying your debts.

If your husband, wife or children are living with you, it may be possible for the sale in the bankruptcy to be put off until after the end of the first year of your bankruptcy. This gives time for other housing arrangements to be made. Your husband, wife, partner, a relative or friend may be able to buy your interest in your home from the trustee. This may be so even if that interest is very small, worth nothing or you owe more on the house than it is currently worth. Such a purchase would prevent a sale of the property by the trustee at a future date. Your spouse or any other interested party should be encouraged to take legal advice about the home as soon as possible.

If the trustee cannot, for the time being, sell your home, he or she may obtain a charging order on your interest in it, but only if that interest is worth more than £1,000. If a charging order is obtained, your interest in the property will be returned to you, but the legal charge over your interest will remain. The amount covered by the legal charge will be the total value of your interest in the property and this sum must be paid from your share of the proceeds when you sell the property.

Until your interest in the home is sold, or until the trustee obtains a charging order over it, that interest will continue to belong to the trustee but only for a certain period, usually 3 years, and will include any increase in its value. Therefore, the benefit of any increase in value will go to the trustee to pay your debts, even if the home is sold some time after you have been discharged from bankruptcy: the increase in the value will not be yours.

If, after a certain time, usually 3 years, your trustee has not sold or obtained a charge over your interest in the property, or applied for an order of possession or obtained a charging order against the property, or you have not come to any arrangement with your trustee about that interest, it may be returned to you.

e. Your pension
A trustee cannot usually claim a pension as an asset if your bankruptcy petition was presented on or after 29 May 2000, as long as the pension scheme has been approved by the Inland Revenue.

For petitions presented before 29 May 2000, trustees can claim some kinds of pensions.

If you are receiving a pension or become entitled to do so before you are discharged, the pension is included as income for the purposes of an income payments order (IPO).

f. Your life assurance policy
Generally, your trustee will be able to claim any interest that you have in a life assurance policy. The trustee may be entitled to sell or surrender the policy and collect any proceeds on behalf of your creditors. If the life assurance policy is held in joint names, for instance with your husband or wife, that other person is likely to have an interest in the policy and should contact the trustee immediately to discuss how their interest in the policy should be dealt with.

You may want the policy to be kept going. Ask your trustee: it may be possible for your interest to be transferred for an amount equivalent to the present value of that interest.

If the life assurance policy has been legally charged to any person, for instance an endowment policy used as security for the mortgage on your home, the rights of the secured creditor will not be affected by the making of the bankruptcy order. But any remaining value in the policy may belong to your trustee.

g. Work-related registrations, licences and permissions
Any registration, licence or permission you hold in connection with your work or trade might be affected by the making of the bankruptcy order. You should inform the person who issued the registration or authority of your bankruptcy to establish if it will remain in force or will be cancelled or withdrawn. Any value attaching to these items may belong to the trustee. In considering this issue you should disregard items of a personal nature such as a driving licence.

h. Your business
If you are self-employed, your business is normally closed down and any employees are dismissed. Any business assets will be claimed by the trustee unless they are exempt and you will have to give the Official Receiver all your accounting records. You are still responsible for completing all tax and VAT returns. Your employees may be able to make a claim to the National Insurance Fund for outstanding wages and holiday pay, payment in lieu of notice, and redundancy. Employees can claim in the bankruptcy for any money owed that is not paid by the National Insurance Fund.

There is nothing to prevent a bankrupt from being self-employed. So you can start to trade again, subject to restrictions. You will be responsible for keeping accounting records for this business and for dealing with the tax and VAT requirements for the new business. You will need to register again for VAT if you meet the registration requirements. You should not continue to use your pre-bankruptcy VAT registration number.

i. Your wages
Your trustee may apply to court for an income payments order (IPO), which requires you to make contributions towards the bankruptcy debts from your income. The court will not make an IPO if it would leave you without enough income to meet the reasonable domestic needs of you and your family. If you have an increase or decrease in income, the IPO can be changed.

IPO payments continue for a maximum of 3 years from the date the order is made by the court and may continue after you have been discharged from your bankruptcy. Or you may enter into a written agreement with your trustee, called an income payments agreement (IPA), to pay a certain amount of your income to the trustee for an agreed period, which cannot be longer than 3 years. There are no fixed guidelines on IPOs or IPAs - each case is assessed individually.

What are the restrictions on a bankrupt?

The following are criminal offences for an undischarged bankrupt:

  • obtaining credit of £500 or more either alone or jointly with any another person without disclosing your bankruptcy. (Note: this is not just borrowing money - it includes your getting credit as a result of a statement or conduct which is designed to get credit, even though you have not made a specific agreement for it. For example, ordering goods without asking for credit and then failing to pay for them when they are delivered);
  • carrying on business (directly or indirectly) in a different name from that in which you were made bankrupt, without telling all those with whom you do business the name in which you were made bankrupt;
  • being concerned (directly or indirectly) in promoting, forming or managing a limited company, or acting as a company director, without the court’s permission, whether formally appointed as a director or not.
  • You may not hold certain public offices. You may not hold office as a trustee of a charity or a pension fund.

After the bankruptcy order, you may open a new bank or building society account but you should tell them you are bankrupt; they may impose conditions and limitations. You should ensure you do not obtain overdraft facilities without informing the bank that you are bankrupt, or write cheques which are likely to be dishonoured. Tell your trustee about any money that you have in the account which is more than you need for your reasonable living expenses. Your trustee can claim the surplus amounts to pay your creditors.


Becoming free from bankruptcy


a. How long does bankruptcy last?

If you were made bankrupt on or after 1 April 2004

You will be automatically freed from bankruptcy (known as ‘discharged’) after a maximum of 12 months. This period may be shorter if the Official Receiver concludes his enquiries into your affairs and files a notice in court.

If you were made bankrupt before 1 April 2004

If this is your first bankruptcy, you will be discharged automatically on 1 April 2005 or, if you currently expect your discharge date to be before 1 April 2005, you will receive your discharge on that earlier date.

If you have been an undischarged bankrupt at any time during the 15 years before the current bankruptcy (unless the previous bankruptcy has been annulled) you will be discharged automatically on 1 April 2009. Or you may ask the court for a discharge 5 years after the date of the bankruptcy order, but the court may refuse or delay your discharge, or grant it conditionally on terms requiring you to make some payments out of your income.

You will also become free from bankruptcy immediately if the court annuls (cancels) the bankruptcy order; this would normally happen when your debts and the fees and expenses of the bankruptcy proceedings have been paid in full or the bankruptcy order should not have been made.

On the other hand, if you have not carried out your duties under the bankruptcy proceedings, the Official Receiver may apply to the court for your discharge to be postponed. If the court agrees, your bankruptcy will only end when the suspension has been lifted and the time remaining on your bankruptcy period has run. If your discharge has been suspended (stopped) prior to 1 April 2004, you should contact the Official Receiver for information about how and when you may be discharged from bankruptcy.

b. Debts

Discharge releases you from most of the debts you owed at the date of the bankruptcy order. Exceptions include debts arising from fraud and any claims which cannot be made in the bankruptcy itself. You will only be released from a liability to pay damages for personal injuries to any person if the court thinks fit.

When you are discharged you can borrow money or carry on business without the restrictions previously referred to. You can act as a limited company director unless you are disqualified from doing so as a result of a separate order arising out of your involvement with a company.

c. Assets you owned or obtained before your discharge

When you are discharged there may still be assets that you owned, either when your bankruptcy began, or which you obtained before your discharge, which the trustee has not yet dealt with. Examples of these may be the interest in your home, an assurance policy or an inheritance. These assets are still controlled by the trustee who can deal with them at any time in the future. This may not be for a number of years after your discharge.

With some assets - such as your home and some types of assurance policy - your spouse, a partner, a relative or friend may want to buy your interest. He or she should get in touch with the trustee straightaway to find out how much they would have to pay.

You must tell the Official Receiver about assets you obtain after the trustee has finished dealing with your case but before you are discharged. These assets could be claimed to pay your creditors. You have a duty to continue to assist your trustee after you have been discharged.

d .Assets you obtain after your discharge

Usually you may keep all assets you acquire after your discharge.


Bankruptcy restrictions orders and undertakings

If, during his/her enquiries into your affairs, the Official Receiver decides that you have been dishonest either before or during the bankruptcy or that you are otherwise to blame for your position, he/she may apply to the court for a bankruptcy restrictions order. The court may make an order against you for between 2 and 15 years and this order will mean that you continue to be subject to the restrictions of bankruptcy. You may give a bankruptcy restrictions undertaking which will have the same effect as an order, but will mean that the matter does not go to court.

Debts incurred after you have been made bankrupt
Bankruptcy deals with your debts at the date of the bankruptcy order. After that date you should manage your finances more carefully. If you incur new debts this could result in:

  • a further bankruptcy order;
  • prosecution if, when you incurred the debts, you did not disclose that you were bankrupt.

The information contained within this section has been prepared with the help of the Governments Insolvency Service latest guidelines.

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