By: Simon B
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Bankruptcy is an option that you can take if you are personally unable to pay your debts – this could affect you if you are a sole trader or part of a business partnership.
However, bankruptcy is not an option if your business is a limited company or limited liability partnership, and is unable to pay its debts – for this, you may need to go through insolvency proceedings.
What is bankruptcy?
Bankruptcy is a situation you may end up in if you find yourself unable to pay your debts when they are due. It is possible to have the state of bankruptcy forced upon you if you have continuously failed to repay debts and allowed them to continue mounting up.
However, bankruptcy is also an option for those who have found themselves incapable of paying off their creditors and need to formally declare this fact so they can begin on the road to recovery. Essentially, bankruptcy is a means of officially stating that your financial situation does not currently allow you to pay back the debts that you owe.
There are certain advantages and disadvantages to bankruptcy as an option, and it is wise to consider the many alternatives to bankruptcy, such as IVAs before you commit to declaring yourself bankrupt. There are situations in which it is the best way forward, however.
How to declare bankruptcy
The bankruptcy process starts with filling out a Bankruptcy Petition referred to as the Debtor’s Petition. This process requires you to contact your local court, which will give you information on your nearest county court that deals with bankruptcy hearings. If you are forced to go bankrupt by your creditors, however, they fill out the petition which is referred to as the Creditor’s Petition, but it is important to know that this only happens if you owe them more than £750. You should also be aware that filing a bankruptcy petition does not prevent your creditors from contacting you or trying to sue you.
An Insolvency Practitioner is appointed as the Official Receiver (civil servant and officer of the court) when your petition has been filed. This person will go through a fact-finding and diligence process with you. This includes attending meetings with the practitioner to provide information on numerous factors such as who you owe money to, what you earn, your general household spending and any other information.
You have to attend the Bankruptcy Hearing once a date is set with your Official Receiver. The Magistrate will review all the information provided by the Official Receiver and judge whether a Bankruptcy Order is to be issued. Not all hearings in a petition are granted and are sometimes dismissed if an administration order is more appropriate. There may also be a delay to seek further information on your situation. The hearing may also result in the appointment of an Insolvency Practitioner to set up an Individual Voluntary Arrangement instead.
In the result of a Bankruptcy Order, a bankruptcy period of 36 months can be reduced to 12 months. You will then sell your assets to raise sums of money as well as contributions from your income each month.
When you become officially bankrupt it is published in the local newspaper and is recorded on the Insolvency Register and the Credit Reference Agencies. Your landlord is also notified if you are a tenant.
The immediate effects of bankruptcy involve doing the legal imperative to do whatever you can to settle your debts. While it is understood that you may be incapable of fully paying them off, you are required to do what you can. Your bankruptcy records will persist for several months after your bankruptcy has ended.
Impact on you and your business
Your business will be affected by your bankruptcy – you will lose your professional status and will be forced to stop trading. This has damaging consequences in the short term and can harm future employment prospects.
If you run your own business it will usually be closed down and your employees dismissed once the bankruptcy order has been made. After your bankruptcy period, it is possible you can trade again on the condition that you trade under the same name in which you were declared bankrupt. In general, it is very hard to find employment, and there are roles that you cannot hold – for example, director of a company, councillor, MP, estate agent or a magistrate.
Bankruptcy should not be taken lightly, as it can limit what you can do in the future. However, after bankruptcy, you can begin to rebuild your finances and start over with a clean slate.
Bankruptcy records and the Insolvency Register
It is important to know how your bankruptcy is recorded along with what details will be kept, how long for and how you can search for them. Details of your bankruptcy will be kept if you are bankrupt at the time or if you have been bankrupt within the last three months.
The records will show details of any current individual voluntary arrangements (IVAs), fast track voluntary arrangements (FTVAs) as well as any current bankruptcy restriction orders (BROs) and bankruptcy restriction undertakings (BRUs). You can obtain this information by either searching online or by visiting your local official receiver’s office. To search online you will need to visit the Insolvency Service website and by navigating through the relevant links you will access information quickly and easily on the bankruptcy records register.
Once you have located your records you will find various details on your bankruptcy. This will include brief information on yourself such as your name, your date of birth, last known address and your occupation. They will also contain details of the current bankruptcy order, the automatic discharge date or the date that you were discharged. If you have a voluntary arrangement the records will contain information including your name, your address and all the details of the arrangement. For bankruptcy restriction orders the information will include your name, date of birth, address and occupation details.
You should also be aware of the details that are not kept on your bankruptcy records. For example, there will not be any information on any disqualified directors, company insolvencies, insolvencies in Scotland and Northern Ireland or any cancelled or withdrawn bankruptcy orders.
Bankruptcy records are not permanent and will stay on the register for only three months after you have been discharged. Records will also be removed if the bankruptcy order has been cancelled or a voluntary arrangement has been agreed or if you have paid your debts off. With IVAs and FTVAs, the records will stay on the register until they have been completed or withdrawn and with BROs and BRUs the records will stay on the register until they are completed, cancelled or expired.
Alternatives to bankruptcy
It is important to know that bankruptcy is only one option and that there are other alternatives to solving your debts. You may find that these alternatives are preferred by your creditors, particularly if they will result in them being paid back more money in the long term.
Individual Voluntary Arrangements (IVAs)
The most common alternative is an Individual Voluntary Arrangement (IVA), which was introduced in 1986 by the government. It is a legally binding agreement between you and your creditors where you are expected to pay what you can afford outside reasonable living costs.
This arrangement normally lasts for about 5 years and is an alternative suited to people who have large debts and cannot afford their current monthly payments.
Debt Relief Orders (DROs)
A Debt Relief Order can spare you having to pay off towards your debts for a specified amount of time, usually a year. During the period that the DRO is in force, the people or organisations your owe will not be able to force you to pay off the debts, and your debts will be written off at the end of the period.
A DRO will only cover certain debts – these are known as qualifying debts. Business debts count as qualifying debts, as do loans, credit cards, rent arrears, and a number of other debts. However, certain other debts, including magistrates’ court fines, student loans, and child support payments.
You can only apply for a DRO if you meet specific qualifications – you can’t apply if you own your own home, and your qualifying debts must amount to less than £15,000. You must also have less than £50 a month left over after paying your usual household expenses, and you can’t have applied for a DRO in the last six years.
A DRO also places restrictions on you – you will need to get permission from the court to be a company director for a limited company, or if you want to play any part in setting up, managing or promoting a limited company. You will also be banned from getting credit of £500 or more from anyone without telling them about your DRO.
You can’t apply for a DRO on your own – you will need to get an authorised debt advisor, known as an “Approved Intermediary”, to do it for you. Most approved intermediaries will charge for this service, although there are charities which can act as an approved intermediary. GOV.UK has more advice about finding an approved intermediary.
Another alternative is debt management, an arrangement which usually involves a designated third party assisting you with paying back your debts. However, this alternative is not suitable if you have serious debts.
Cancelling a bankruptcy order
Cancelling a bankruptcy order can be done with a court procedure known as a bankruptcy annulment. There are three cases where you are permitted to apply for an annulment.
One instance is if your bankruptcy order should not have been made; for example, if the appropriate steps were not taken when acquiring the order. This is also the case if all of your bankruptcy debts including its fees and expenses have all been paid for and secured to the court’s satisfaction. You can also go about annulling a bankruptcy if you have reached an Individual Voluntary Agreement with your creditors.
There are also procedures for annulling a bankruptcy if the order should not have been made. In this case, you will have to obtain an application form from the court that is dealing with your bankruptcy. You should then make an affidavit which is a written statement or a witness statement that is verified by a statement of truth explaining why the bankruptcy order should not have been made. You should then take the completed form and affidavit/written statement, verified by a statement of truth, to court. The court will then set a date for your hearing which you should attend. However, before the hearing it is important you let your Official Receiver, the person who petitioned your bankruptcy and the trustee know the date, time and location of the hearing. It is also recommended you send them a copy of the form, affidavit or written statement. Then, after the hearing, the fees and expenses of the bankruptcy will have to be paid.
If the bankruptcy debt has been paid off you can get the bankruptcy annulled. To do this you will have to get an application form from the court and then make an affidavit or a witness statement verified by a statement of truth setting out the details of your assets as well as the details of the payments made or how you secured the payment of your debts. You should then take the form and affidavit/witness statement and set a date to hear your application. Then, at least 28 days before the hearing, you should inform the Official Receiver and trustee of the time, date and location of the hearing and send them a copy of the form and affidavit/statement.
A successful annulment will make it seem a bankruptcy order was never even placed and your assets will return; however, you will still have to pay off any debts that had not been paid off during the bankruptcy.