Bankruptcy is often the solution of last resort, but recent changes in the law have made it more often than not the most appropriate route for ordinary people, resulting in something like 70,000people in the UK likely to petition for their own bankruptcy in 2007.
My personal view is that bankruptcy should be the ‘default option’ for people with severe financial problems, and that people should only take alternative routes if n doing so they:
1) Protect their assets; or
2) Protect their income.
Bankruptcy is far easier a process, with fewer implications, than it used to be. Many IVA factories fail to tell you the real truth behind bankruptcy, they use salesmen to sell you he wrong solution, from which they make money. Their driving force in doing so is greed. Such commercial organisations have come under severe criticism in recent years, from all sides, for promoting the wrong solution. Such factories are themselves now going to the wall, leaving hundreds of debtors exactly where they started off at the beginning of the IVA, having wasted time, money and effort. Do not blindly ‘take the easy way out’ of an IVA, instead take time to assess the bankruptcy option.
If, after considering the alternatives, you decide that you have no realistic alternative for clearing your debts or indeed if you want to simplify your life and clear your debts quickly, you can petition for your own bankruptcy at your local county court. The cost for such a ‘debtor’s petition’ is about £500 including court fees and Official Receiver’s fees, but, people on means tested benefits often pay far less (you should ask the court). For an additional fee an Insolvency Practitioner or experienced insolvency lawyer can help you fill in the petition, but most people find that this is unnecessary as the forms are relatively simple, so save your cash if you can! You can also fill out the forms on the internet via the Insolvency Service website.
Someone called the Official Receiver will be responsible for managing your bankruptcy. The OR is a civil servant. They have posted several brochures to their website, which they say are there to help people. But my advice is not to make decisions based solely on what you read there as I have to say that I find the brochures written in quite an unfriendly, cold, and uninformative way.
Your creditors can petition for your bankruptcy, but in practice credit card and unsecured personal loan companies choose not to do so, preferring to employ their own internal or external debt collectors to increase the pressure on you to increase your payments to them. Alternatively they sell their debt at a discount to companies that buy ‘under-performing’ debt, with those companies then hassling you even more for cash. This way they avoid the £1,000 or so cost of making you bankrupt. I often find that in practice, if you do not make yourself bankrupt, then no one else will. So it is in your hands. But the longer time passes, the more you continue downward in an seemingly never ending spiral of debt and increasing creditor and cash pressure.
Making yourself bankrupt through a debtor’s bankruptcy petition is like a visit to the doctor’s: something you dread but is not so bad in reality. Indeed you will find that you may never see the District Judge (especially if you complete the petition fully and note on it that you have taken an Insolvency Practitioner’s advice) as he is often very busy: making you bankrupt is often, at least for him, just a rubber stamping exercise! And bankruptcy comes as a welcome relief, you can tell your creditors not to contact you any more, and if you approach it properly and constructively, it provides the first step to rebuilding your and your family’s finances and a new life.
The main disadvantages of Bankruptcy include stigma (but this is mostly in your own mind – and you can control this- but frankly who cares less what the mothers at the school gate think, as in a week or so it will be yesterday’s ‘chip paper’); possible job loss (although this is very rare as it generally only happens to professionals such as lawyers, accountants, and senior management); the loss through sale of assets (which could, but does not always have to, include your home, and anyway most people have sold virtually everything anyway to try to stave off bankruptcy); income reduction (this again applies to the ‘professionals’ and some self employed rather than ordinary, employed, working people – the OR will not contact your employer to tell him of your bankruptcy); and a credit rating that cannot be repaired for a minimum of 6 years (your credit rating is probably shot anyway and will remain so whatever route you take – indeed bankruptcy is probably one of the quickest routes to geting a good credit rating back!). Bankruptcy is a realistic solution where the advantages of bankruptcy outweigh the disadvantages or where those disadvantages are of no consequence (the motto of ‘if you haven’t got it, they can’t take it, can they?’ applies), as is the case for more than the vast majority of ordinary people, hence why so many people now chose bankruptcy. In reality for the vast majority of ordinary people the ‘disadvantages’ are few and merely ‘temporary inconveniences’ which are worthwhile undergoing for the greater long term benefits.
Most people who declare themselves bankrupt have few or no assets that the Official Receiver could seize and sell. There are restrictions on what the Official Receiver can seize and sell. He cannot seize personal possessions such as wedding and engagement rings; nor normal household furniture; nor normal clothing; nor the tools of the bankrupt’s trade; nor a vehicle worth under £2,500 to enable the bankrupt to work or to travel around (say if disabled); nor most pension entitlements; nor anything owned by any other family members (individuals go bankrupt, not the family). Indeed in the vast majority of cases, he can take nothing! Nor will he come round your house.
However, if you do have assets that are not so ‘excluded’, then these assets will be realised by the Official Receiver.
There several common misunderstandings as regards your home. Most people assume that if you are made bankrupt and you own your own home, you will lose it. This is simply not so. You should read very carefully my guidance in a separate post on my blog, and take professional advice on your own particular circumstances.
If there are no assets to realise in your bankruptcy the Official Receiver will retain the conduct of your case. If there is a reasonable level of assets that can be realised (say over £20,000), the conduct of your case could be handed out to a Licensed Insolvency Practitioner who is appointed as your ‘Trustee in Bankruptcy’. His role is virtually identical to that of the Official Receiver, and he has all the powers afforded to the Official Receiver. Your duties to him are the same as those owed to the Official Receiver, namely to assist him do his work. Apart from helping the OR and trustee when asked (say on realising assets), attending on them if asked in for an interview, supplying paperwork on your historic finances, you do little more: the OR/trustee takes full control of the bankruptcy on his own. Bankruptcy is not onerous on you in terms of your time commitment – you really can start your life afresh!
Depending on your earnings post bankruptcy, you may be required to make contributions to your creditors out of your income. The amount that you pay is determined by the amount that you can reasonably afford after the normal living costs typically incurred by a person in your position. The amount allowed for living costs may be lower than your actual costs where you have been accustomed to an ‘excessive lifestyle’: the Official Receiver uses a mixtture of actual costs (e.g mortgage, rent, council tax) and ‘guideline living costs’ set out in a government survey called the Family Expenditure Survey for those other costs he believes you should be incurring: Bu if you can prove to him that you have unusual circumstances, such as if you have a medical condition or have to travel large distances to work, he should allow an increase on these fairly low base costs.
But at the moment the Official Receiver is taking an unrealistic view of some of the costs of living: but just because he is who he is does not mean that you should agree with his figures: you should challenge them if you think he is being unreasonable: provided that you are being reasonable, you have nothing to lose by having the court re-assess those figures, the court will err on the side of the ‘small man’. Judges on £100k a year will not look favourably on the OR trying to push a bankrupt into an IPA where the monthly contributions are a mere few hundred pounds: the Judge’s time is precious. This is called an Income Payments Agreement or Income Payments Order ( an ‘IPA’ or ‘IPO’) and it will remain in force for 3 years from the date of the agreement/order. This means that even though you may have been discharged from your Bankruptcy after 6 months to 1 year, you will still have to continue paying your IPO for a further 2 + years.
You are free of your debts on your ‘Discharge’ from bankruptcy. Provided you assist the OR you will be automatically discharged from bankruptcy just 12 months after the start of your bankruptcy. You could be discharged as early as 6 months if the Official Receiver is satisfied over your conduct both pre- and post- bankruptcy and decides not to investigate further. Many consumer debt related bankrupts are now obtaining their discharge at 6 months. Notwithstanding your duties to do so, it is worthwhile helping the Official Receiver throughout the bankruptcy as this will hasten your discharge, and avoid a ‘Bankruptcy Restriction Order’ (see below). Although discharge times have been reduced by recent legislation there is a sting in the tale…… your conduct immediately before going bankrupt could go against you. If you are found to have been dishonest or reckless, or failed to comply with your duties to the Official Receiver, he can apply for a ‘Bankruptcy Restriction Order’ or agree a ‘Bankruptcy Restriction Undertaking’ with you , which has the effect of extending the restrictions imposed on you by your Bankruptcy by 2 to 15 years depending on the severity of your actions. Misconduct prior to 1 April 2004 will, however, not be taken into account. Any Bankruptcy Restriction Order/Undertaking will be registered on the Insolvency Service website. There used to be separate discharge times that applied to people who were in a second Bankruptcy but this is now irrelevant, unless this is your second Bankruptcy in 15 years.
Even after your discharge it could be difficult, or if you do it will be more expensive, to get unsecured credit. Your credit records will show your Bankruptcy for 6 years. However, credit reference agencies may well keep it on record for a lot longer even though it should be removed from their records at the same time. All lenders check these records when they are considering an application for credit, a loan or mortgage. But nowadays there are more and more mortgage companies willing to give secured loans to former bankrupts at interest rates virtually no different from Jo Public. After all, they are secured against a property, and property values do tend to go up over time.
If you have been unfortunate enough to have had a Bankruptcy petition filed against you in error then you should seek professional advice as soon as possible. Or if you have been made bankrupt recently, but should not have been so, all may not be lost as you may still be able to have the Bankruptcy ‘annulled’ or you could still put in place an Individual Voluntary Arrangement (see my separate post on IVAs). Take early professional advice from an IP.
The advantages of Bankruptcy are :
- Bankruptcy is a speedy, conclusive and inexpensive way to ‘lose your debts’.
- It provides a platform on which you can subsequently rebuild your finances and indeed, your life.
- If you follow the debtor’s petition route, you can hasten going into bankruptcy. Creditors cannot stop you going Bankrupt.
- Your debts (with the exception of student loans, fines and CSA payments and certain other family split related debts) are ‘written off’ when you are discharged at between just 6 to 12 months. Compare this with an income based IVA, typically 5 years, and a DMP, many of which I see for upwards of 5 years.
- All contact from creditors during and after the bankruptcy should be with the Official Receiver: you should receive no more debt collection letters or calls as soon as you are made bankrupt (if you do, you should just tell the OR to sort out the creditor concened).
- You are forced to live your life differently after bankruptcy as you will find it difficult (but not impossible) to obtain credit: you may not believe it now, but his really is not a bad thing. You will enjoy life far more.
- Bankruptcy does necessarily mean you will lose your home. See my separate post.
- Your finances are ‘standalone’, you are a separate person in the eyes of the law from your family : your relatives will not come under any pressure as they would with DMPs or IVAs to contribute towards your living costs or debts. Don’t forget, you can go bankrupt, your other half does not have to do so: she/he will have her own choices and what she/he does will depend on an assessment of her/his own financial circumstances. What you chose to do may be very different from what your other half choses to do: this gives you, as a family unit, options.
The disadvantages of Bankruptcy include:
- Until you are discharged you cannot:
- Act as a company director
- If you are an accountant, lawyer, barrister, soldier, policeman or other professional for whom avoiding bankruptcy is essential, you could lose your job and thus suffer a significant reduction in your income, from which you may never recover. Interestingly, the law was changed a few year ago to enable MPs to go bankrupt without losing their position! Wonder why they voted that in?
- Your debt problems may not remain confidential between you and your creditors. Your name will be ‘published’ in the Government’s register of Bankrupts, which is available on the internet, and in the public notices section of the local newspaper, and in the Stubbs Gazette, a publication used by credit rating agencies . Your Bankruptcy will stop on the credit files of various credit rating agencies for 6 years. Your employer cannot be told directly, but he may find out about your bankruptcy where you get a ‘nil tax code’ – bankruptcy is one of very few reasons for getting a nil tax code.
- If you have ‘surplus income’ (because you are no longer making any debt repayments) you could be made subject to an IPA/IPO for 3 years. However, the amount of the IPO is typically 50% to 70% of your net disposable income after paying essential living costs: this is almost always less than you would be required to pay into a DMP or IVA and for much shorter a period. If you have no ‘surplus income’, there is no IPA/IPO: the OR cannot get blood out of a stone!
- Your credit rating will remain poor for at least 6 years post discharge. It is illegal, while bankrupt, for you to incur any form of credit above £500 without first telling the lender you are bankrupt.
- Your finances come under scrutiny by The Official Receiver. Certain transactions, particularly where you may have given away assets for no value or sold them for less than they are worth, or paid some creditor ‘preferentially’, could be upset, particularly if those transactions are in favour of a ‘connected party’ – typically your family. The Official Receiver will review your finances going back up to 5 years, searching for such transactions, although most of his focus will be on the last 6 months before bankruptcy.
- Some people find the court process and interview by the Official Receiver daunting. In practice 99% of people find these things much easier than they envisaged beforehand. But it is still a worry.
- If, for any reason, you do not assist your Official Receiver in fulfilling his duties, you could be made subject to a BRO/BRU, effectively extending the period of your bankruptcy. So help him! But helping him does not mean that you have to agree with him all the time.
- You will experience a few inconveniences, including:
- You will probably have to change banks as the top 4 banks will not operate accounts for bankrupts. Your standing order and direct debit arrangements will have to be changed. Go to Nationwide or CoOp: they will operate accounts for bankrupts.
- You will have to make some unpaid time available to go to court to present the debtor’s petition, to complete various forms required by the Official Receiver, to be interviewed by the Official Receiver (although in practice this is often just a telephone interview), and to answer any further questions the Official Receiver has.
Bankruptcy can be the right course for people:
- Who have no assets or at least no assets that the Official Receiver can seize and sell.
- Who have uncertain income levels, poor job security, a low level of disposable income, or are reliant on benefits. As a rough rule of thumb, in my view, if a four member family unit has an annual income of under £40,000 pa, Bankruptcy could be the best option for you (that is if you have no assets to protect) for sorting out your finances.
- For whom the speed of losing their debt is important. This is particularly so for people approaching retirement, they want time to save a little to be able to enjoy retirement; or for people whose children will want to go to university in the next 6 or so years, this way they can save to help them through uni without coming out with debts; or for people with a young family, why should the quality of your children’s childhood suffer because of your debt problems?
- Who do not expect a windfall receipt, such as a legacy from a relative or significant profits from a developing business venture, before discharge. If you are thinking of going bankrupt, your relatives should consider changing their wills to cut you out of your inheritance, say leaving it instead to your children. Don’t forget, it is your relative’s choice to whom they leave their money: they are under no obligation to leave all they have worked so hard for to your creditors: they want to see it used for the benefit of the family, letting it fall into the hands of the OR by chance does not do that. Once you have been discharged from bankrupty, they can change their wills back again: you keep windfalls post discharge. This is not illegal, this is allowing your relatives to leave their money to who they want.
- Are poorly disciplined in terms of budgeting. Bankruptcy forces better budgeting, you have to deal only in cash. If you haven’t got it, you cannot spend it, you can no longer rely on credit to support you in those bad weeks.
- Are close to retirement and have an occupational, as opposed to a personal, pension scheme. Occupational pensions are not realised by the OR. Some personal pension schemes are. Take professional advice.Bankruptcy is normally not the right course for people who:
- Who have signifiant assets that can be seized in a bankruptcy.
- Whose income or career will be severely effected by Bankruptcy.
I hope that you find this quick overview of use. Please let me have your comments.