In England & Wales, bankruptcy refers to the point when an individual, not a company, is declared by a court to be insolvent. There are pre-emptive measures an individual anticipating a bankruptcy declaration can take in order to safeguard particular assets from their creditors. Some types of asset can never be shielded through bankruptcy, and it is imperative to note the long-term consequences of a declaration, including public reporting and refusal of future credit.
Petition by debtor or creditor
A debtor can apply to be declared bankrupt, subject to a fee payment of £680. In the alternative, a creditor of an individual is able to petition a court to have a debtor declared bankrupt if they are owed £5,000 or more.
Effect of bankruptcy declaration
Upon a declaration of individual bankruptcy, an individual’s assets are placed under the remit of the Official Receiver. In turn, the Official Receiver will convene a meeting of the individual’s creditors, who will nominate an Insolvency Practitioner to handle the assets in the capacity of a trustee with the creditors as beneficiaries.
Some items, such as a car, may be exempt from sale if required as a basic need or for the care of dependents. The basic need reasoning also applies to tools or equipment needed to carry on a business, clothes, furniture and cooking equipment. If an individual declared bankrupt proceeds to sell or give away non-exempt assets, this can constitute a criminal offence.
If more than one individual owns debt, the bankruptcy of one will not shield the other from action for recovery of amounts owed by creditors. Where a business partnership is concerned, the same rule applies, and all partners would have to make a joint petition for bankruptcy.
If goods are jointly owned, the Insolvency Practitioner as trustee may afford the non-bankrupt party the chance to buy-out the bankrupt party’s share in the goods.
Where an individual debtor is not a British citizen, a bankruptcy declaration can have consequences for a future application for adjustment of status or citizenship.
Priority of creditors
In all cases, creditors who have security in the individual’s assets have priority over unsecured creditors.
Termination of bankruptcy status
After a 12-month period, an individual will be discharged from bankruptcy, alongside any unpaid debts. Certain debts and liabilities will not be written off, including court fines, confiscation orders, child support, student loans, secured debts, benefits or tax payments. A mortgaged home will also not be shielded from foreclosure through bankruptcy.
Bankruptcy Restriction Order
Where the bankrupt’s conduct resulting in their financial circumstances leading to bankruptcy has been particularly egregious, the Official Receiver may have scope to apply to court for a Bankruptcy Restriction Order (BRO), or a Bankruptcy Restrictions Undertaking (BRU) upon application to the Secretary of State. Both sanctions place restrictions on directorship or borrowing sums of money, and can last for up to 15 years.
If there appears to be a risk of an individual leaving the country upon being declared bankrupt, they may be compelled to surrender their passport.
Long term effects of a bankruptcy declaration
There are a range of potential negative long-term consequences of being declared bankrupt. These include:
- individual credit rating being affected for up to six years;
- forced sale of residential property;
- exclusion from certain professions; and
- the stigma attached to a public declaration of bankruptcy.
If a previously bankrupt individual wishes to be a company director, they must apply for leave from a court. Nor can such an individual establish or promote a company without similar leave.
Alternatives to bankruptcy
There are two general alternatives to insolvency available to individuals: (1) an Individual Voluntary Arrangement (IVA); or (2) a Debt Relief Order (DRO).
Individual Voluntary Arrangement
In England & Wales, a person declared bankrupt, or anticipating such a declaration, can propose a repayment scheme to their creditors. This method enables the individual to safeguard certain assets that would otherwise be sold off in bankruptcy.
In order to have an Individual Voluntary Arrangement to be endorsed by creditors, creditor(s) who cumulatively hold an amount valued in excess of 75% of the sums owed must approve of it. If endorsed, an Insolvency Practitioner will be appointed to oversee the process. If successfully sought prior to a bankruptcy declaration, such an agreement will remove the requirement for court action or appointment of an Official Receiver.
Debt Relief Order
Where a debtor is a low-income individual, they may be able to seek a Debt Relief Order. In order to qualify, the debtor must meet certain criteria, which include:
- not having liabilities in excess of £20,000;
- not having savings or other assets in excess of £1,000;
- after household expenses, their disposable income does not exceed £50; and
- no DRO has been entered into within the previous six years.
Before entering into a DRO, a debtor must be meticulous in working out their eligibility, which can be subject to investigation by the Official Receiver. If considered to have abused the facility, they may be subject to criminal and civil penalties.
Contact our Bankruptcy Solicitors Mayfair and throughout London
A declaration of bankruptcy can be a useful means of writing off debt and obtaining a fresh start, however, it is imperative to be aware of the short and long-term consequences. In every case where bankruptcy is contemplated, the advice of Bankruptcy Lawyer should be sought.
The Bankruptcy Lawyers at Lewis Nedas have served a wide range of clients with their financial affairs during difficult times, including individuals in bankruptcy. We have provided expert advice on asset management, including reorganisation and restructuring of debts.