Bankruptcy

What is Bankruptcy?

Bankruptcy is one of several types of personal insolvency. Other types of insolvency include Individual Voluntary Arrangements, Trust Deeds, and in Scotland, Sequestration.

The technical definition of insolvency is someone who is unable to pay their debts as they fall due.

Most bankrupts petition the court for their own bankruptcy and there is quite a high fee for doing so, including a £130 application fee and a £550 deposit In England and Wales (costs in Northern Ireland will vary and include a solicitor’s fee). Creditors can also petition the court for bankruptcy and do not need to obtain a court judgment before doing so.

Bankruptcy is seen by many as a last resort when all over avenues have been exhausted. It rarely gives any payback to a lender, so many are reluctant to petition for it, but will use the threat of bankruptcy as a means of pressure to persuade a debtor to start making some form of repayment.

On the other hand, some people may welcome bankruptcy, as this will offer full legal protection against all creditors, and often provides a relatively quick way out of financial difficulties, with automatic discharge for many at 12 months after the date of the bankruptcy.

How does someone get declared bankrupt?

Normally a bankruptcy will arise in the following circumstances:

  • A debtor who is insolvent can be made the subject of proceedings
  • Creditors can, alone or jointly, apply for a debtor to be made bankrupt where someone owes at least £5,000
  • The supervisor of an IVA can apply for bankruptcy proceedings against a debtor where they have defaulted
  • A person can petition their own bankruptcy

The Bankruptcy Order itself is usually decided at a hearing in court. During the hearing the court can decide on a variety of options for the individual concerned including dismissing the bankruptcy petition, suspending the proceedings or referring the application to an Insolvency Practitioner to set up an IVA instead. If these are not deemed appropriate, a Bankruptcy Order will be made. For petitions brought about by the debtor in England and Wales, the debtor can apply online, and instead of the decision being made in court, the Official Receiver can adjudicate bankruptcy instead.

Once the Bankruptcy Order is made, the person is declared ‘bankrupt’. Bankruptcy records remain on a credit report for six years and on HM Land Registry/Registers of Scotland files for twelve years, whether you are discharged or not.

What happens once you are declared bankrupt?

Once a person is declared bankrupt, his or her financial affairs are managed by either a Trustee or by the Official Receiver, who puts together a Statement of Assets and Liabilities, and then works out how much can be repaid to creditors. This is usually a very small proportion of the amounts owing.

By law, bankrupts cannot be pursued for any debts that have been included in the bankruptcy, so one of the benefits of being declared bankrupt is to put a metaphorical umbrella up to shelter from the pressures of being chased for debt.

Bankrupts may not practice certain professions (e.g. lawyers and accountants).

How does bankruptcy affect my ability to take out credit?

Regardless of whether a bankruptcy is active, discharged or settled, it can continue to have a considerable impact on the person’s ability to take out credit indefinitely. When applying for some loans (mortgages in particular), the lender may ask if you’ve ever been declared bankrupt. At this point you are legally obliged to disclose the state of any bankruptcies, and if you do not, the lender has the right to withdraw their offer at any point.

Your bankruptcy will be recorded on the Bankruptcy & Insolvency Register, which is free to view to anyone, which means it is available for lenders (and potential landlords or employers) to check at any point. Lenders are permitted to lend small amounts to bankrupts (approximately £500) but few do., as it has proven to be a strong predictor of future financial problems.

Defaults that appear on a Credit Report that are linked to the bankruptcy will not be marked as settled, as usually the debt will have been written off or paid at a reduced or agreed amount. Sometimes if you contact the relevant lenders and provide a copy of your bankruptcy discharge certificate, they will usually be willing to mark the accounts as settled even though they are not bound to do so.

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