Bankruptcy

 October 2016

Fact sheet no. 01 EW Bankruptcy

Use this fact sheet to:

  • understand what bankruptcy is;
  • find out how to make yourself bankrupt;
  • find out how a creditor can make you bankrupt;
  • understand how bankruptcy can affect you and the things you own;
  • understand the main advantages and disadvantages of bankruptcy; and
  • see what alternative options you may have for dealing with your debts. 

This fact sheet includes:

  • some useful contacts and links for you to get further help.

Bankruptcy

Bankruptcy is a way of dealing with debts that you cannot pay. Whilst you are bankrupt any assets that you have might be used to pay off your debts. After a period of time (usually one year) most of your outstanding debts are written off and you can make a fresh start. This is known as discharge from bankruptcy. The effects of going bankrupt are the same whether you apply yourself or a creditor makes you bankrupt.

How to go bankrupt yourself

If you wish to make yourself bankrupt, you must apply online. There is no minimum amount of debt you have to owe before you can apply for bankruptcy. Go to www.gov.uk and search for 'apply for bankruptcy'. If you do not have access to the internet, contact us for advice.

Warning:

answer all questions accurately

It is very important that you answer all questions accurately when you apply. If you provide false information in your application, you could be guilty of a bankruptcy offence.

You have to pay a total fee of £680 to go bankrupt. You can pay the fee online when you apply. If you cannot afford to pay the full fee all at once, you can pay the fee by instalments. However, you must pay the full fee before you can complete your application. You can also pay the fee in cash at certain banks. However, if you choose this method, you cannot pay by instalments and you must pay the whole fee at once. If someone has agreed to make the payment for you, they can pay online when you apply.

Once you have completed your online application, it is sent to the adjudicator at the Insolvency Service. You do not have to go to a court hearing. The adjudicator will check your application to make sure that you cannot pay your debts as they fall due. They will also check that England or Wales is the correct place for you to go bankrupt.  The adjudicator will decide whether to make a bankruptcy order within 28 days of receiving your application.

If the order is made you will then have an appointment to see the official receiver who deals with your bankruptcy. Sometimes this will take place over the phone. They will want to go through a long questionnaire with you to look at all of your personal and financial details, such as your National Insurance number and pension policy details, income, outgoings and assets.

If the adjudicator refuses to make a bankruptcy order, they will send you a notice to tell you this. This is called a ‘notice of refusal’. This notice must tell you why the adjudicator did not make you bankrupt. You can ask them to review their decision, but you must do this within 14 days of the notice of refusal being delivered. When the adjudicator reviews their decision, you cannot provide them with any new information. You must give reasons for asking the adjudicator to review their decision, but they can only consider the information you provided with your original application. If the adjudicator still does not make you bankrupt, they must send you a notice to confirm this. You can appeal to the court against their decision, but you must do this within 28 days of getting this notice which confirms the adjudicator’s original decision. If you appeal to court and lose, you may have to pay extra court costs.

If you want to appeal to the court against an adjudicator’s decision, you will need extra help. Contact us for advice about finding the type of help that you need.
 

Creditor makes you bankrupt

A creditor can make you bankrupt if you owe £5,000 or more to that creditor and you have not been able to agree how to repay the debt. Creditors can ‘club together’ to make you bankrupt but this is rarely done. You can also be made bankrupt if your individual voluntary arrangement (IVA) fails.
Before presenting a bankruptcy petition, a creditor usually needs to send you a ‘statutory demand’.  A statutory demand is a pre-court form that requires you to either:
  • pay the demanded amount;
  • offer to secure the debt against any property you own (create a voluntary charge); or
  • offer to pay the debt in a way that is satisfactory to the creditor (for example by instalments).

Information:

statutory demands

In certain circumstances, for example you have an IVA that has failed, your creditors do not have to serve you with a statutory demand before making you bankrupt. If you have an IVA that has failed, or have received a statutory demand, contact us for advice.

Statutory demands can be hand delivered or posted.  Some creditors use them as a bluff to try to get you to pay the debt quickly, for example by borrowing elsewhere, but the creditor may not actually apply to make you bankrupt. This is because it does not cost very much for a creditor to send you a statutory demand, but the creditor would have to pay large up-front fees to make you bankrupt.

You can apply to have a statutory demand ‘set aside’ in certain circumstances – for example if your debt is below £5,000 or there is a significant dispute about the money owed. There are strict time limits for doing this. Contactus for advice.   

See our fact sheet:

Statutory demands.

The creditor can apply for a bankruptcy order through the County Court 21 days after a statutory demand has been served.

Assets

Information:

assets

Certain goods are not treated as assets. These are things such as clothing, bedding, furniture and household equipment for basic domestic needs.

Once you are bankrupt an ‘official receiver’ will be appointed to deal with your case and to sell your assets. In certain circumstances (for example if you own a lot of valuable items) a separate insolvency practitioner may be appointed to deal with your assets. The person who deals with your assets in bankruptcy is known as the ‘trustee’.

Items necessary for you to carry on your employment such as tools, books or vehicles can be excluded. If you have valuable household items such as antiques, or expensive electrical equipment, then these could be sold in order to raise money. Your car might be sold if it is valuable, but it may be exempt if it is necessary for your employment. It can also be exempt if it is essential to meet the basic domestic needs of you and your family. Even if your car is exempt, you may have to buy a cheaper replacement depending upon its value. The effect of bankruptcy on your car can be a complicated area. Contact us for advice.

Information:

your home

The only asset treated differently is the house where you live. See the later section Property.

If the official receiver decides you have assets then they will usually be sold as soon as possible.

If you are discharged from bankruptcy before any assets are dealt with, they will not belong to you on discharge. Your assets will continue to belong to (or ‘vest’) in the official receiver until they are dealt with.

Hire-purchase agreements

There may be a clause in the hire-purchase agreement that allows the hire-purchase company to terminate the agreement if you become bankrupt. In this situation, you may have to return the item. Depending upon how much is left to pay on the agreement and the value of the vehicle, the official receiver may take action to sell the vehicle. There may be some situations where you can keep the vehicle if a third party takes over the agreement for you. In some limited circumstances, you may be allowed to keep making the payments under the agreement yourself. Contact us for advice.

Pensions

Information:

income from pensions

If you have a personal or workplace pension fund that you have claimed, the official receiver will look at the income you get from it. They will take this into account when they decide how much you should pay into your bankruptcy. See the later section Payments from income and contact us for advice.

If you have a personal or workplace pension fund, it will not usually be affected by bankruptcy. You are likely to be able to keep it except in rare cases where you have paid very large amounts into your pension to try to stop creditors taking your savings. Contact us for advice.

Property

The value (or ‘equity’) in a property can be worked out by taking away from the value of the property the amount you owe under any mortgages and secured loans. We use the term ‘beneficial interest’ to describe your share of the equity.  If the property is solely owned by you, your beneficial interest will usually be all of the equity. If the property is jointly owned with someone else, your beneficial interest will be part of the equity.

  • If you own property then this might be sold depending on whether it has any equity in it. If you or your spouse and any children live there then there are rules about how quickly this can happen. Contact us for advice. Once you have gone bankrupt, your beneficial interest in your home is transferred to the official receiver or trustee.
  • If you are the sole owner then the whole of the value in the property is transferred to the official receiver or trustee.
  • With jointly owned property the official receiver or trustee is usually only entitled to the bankrupt person’s share of the equity (that is their ‘beneficial interest’).
  • Depending on your circumstances, you may be considered to have a beneficial interest even if you are not named on the mortgage. This is a complex area so contact us for advice.
  • It may be possible for the joint owner or family and friends to make an offer to the official receiver or trustee to buy out your share of the equity. This can be particularly helpful if there is little or no equity.

How long does the official receiver or trustee have to deal with my family home?

The official receiver or trustee has a maximum of three years from when you went bankrupt to deal with your family home. However, this action may be taken before three years have passed. If you went bankrupt before April 2004 and you are now being asked to sell your family home, contact us for advice
The term ‘family home’ means: 
  • the place where you normally live;
  • the place where your spouse or ex-spouse normally lives; or
  • the place where your civil partner or ex-civil partner normally lives. 
Other properties (such as those you rent out) will not be dealt with under the rules described in this section. If you have a beneficial interest in a property that is not classed as your family home, such as a buy-to-let property contact us for advice.
Within the three years, the official receiver or trustee could:
  • come to an agreement with you about the property;
  • sell your beneficial interest to a joint owner or other third party;
  • apply for an order of possession of your home;
  • apply for an order for sale of your home; or
  • apply for an order to give them security over your home (known as a charging order). 

If they do not deal with your home within the three year time limit, it will automatically pass back to you.

  • If your beneficial interest is less than £1,000 when it is finally reviewed, no action will be taken and your beneficial interest will automatically pass back to you.
  • If your beneficial interest is more than £1,000 when it is finally reviewed, the official receiver may apply for a charging order against your home. Alternatively, a separate insolvency practitioner may be appointed to sell your home.

Is there a special scheme that can be used to buy back my beneficial interest?

If the official receiver is acting as your trustee and your family home is in joint names, you may be able to use a ‘property conveyancing scheme’ run by the Insolvency Service.  This scheme helps to keep the cost of the process low.

However, you will not be able to use this scheme if:

  • your property is in your sole name; or
  • a separate insolvency practitioner is acting as trustee. 

Extra advice:

get more help

If you are considering bankruptcy and are worried about the effect on your home, contact us for advice.

If you are not able to use the Insolvency Service’s property conveyancing scheme, the costs relating to the process of buying your beneficial interest are likely to be a lot higher. In any case, you will need independent legal advice from a solicitor. They will charge you for their services. Any third party who wants to buy back your beneficial interest will also need legal advice. Contact us for adviceon how to search for a solicitor.

Information:

keep paying your mortgage

If you have a mortgage or secured loan on the property, the ongoing monthly payments still need to be maintained to stop your lender taking possession action.

What if I rent my home?

If you have rent arrears from before the date of your bankruptcy order, your landlord can still take court action to evict you from your home. However, they cannot get the arrears back from you because they are a debt that will be included in your bankruptcy.

If you build up any rent arrears after the date of your bankruptcy order, your landlord can take action to evict you and get the arrears back.

When the official receiver works out whether you should pay anything from your income, you will not be allowed to pay anything towards your rent arrears if your landlord has not yet taken court action against you. If your landlord has already taken court action against you, the situation is more complicated. Contact us for advice.

Payments from income

Information:

payments to creditors in bankruptcy

If your surplus income is above £20 per month, the official receiver will usually expect you to pay it all into your bankruptcy. 

This will only happen if you have enough spare income (or ‘surplus income’) after paying ordinary household expenses. The official receiver will look at your income and outgoings and decide if payments should be made and at what level. When looking at how much you could pay they will take into account essential expenses such as your mortgage, rent, household bills and housekeeping.

Income payments orders and income payments agreements

Most bankruptcy orders will end after one year. You may be asked to sign a legally binding agreement to pay monthly instalments from your income to the official receiver for three years from the date of the agreement. This is called an ‘income payments agreement’. If your circumstances change then you need to tell the official receiver, as the agreement can be looked at again. If you do not pay, the official receiver can ask the court to order you to pay the instalments. This is called an ‘income payments order’.

If you do not make a voluntary agreement then the official receiver can ask the court to make an ‘income payments order’. This will run for three years from the date of the order. You can ask the court to look at this order again if your circumstances change.

Information:

if you receive only state benefits

If your only source of income is state benefits, an income payments agreement or order should not be made.

Warning:

negative equity

Be careful if you live in mortgaged accommodation, have secured loans on your home and your home is in negative equity. Negative equity means that if your home were to be sold, not all of the mortgage and secured loans would be repaid. In this situation, the official receiver may not take into account payments to the secured lenders when they work out how much you should pay under an income payments agreement. If this situation applies to you, contact us for advice.

Effects of bankruptcy

Information:

opening a bank account

Some banks will not let you open an account when you are bankrupt. We have details of basic bank accounts that may be able to help. With these accounts you may be able to have a cash card but no cheque book. Contact us for advice.

  • You will usually have to close your bank or building society account when you are made bankrupt. You may be able to open another one as long as the bank or building society allows you to. You must tell the bank or building society that you are bankrupt. You will usually have to wait to open the account until after you have gone bankrupt. It is up to the bank to decide if you can open an account with them.
  • Gas, electricity and telephone companies usually want you to pay in such a way that involves you not having credit. If you live with a partner you could transfer the account into their name. Sometimes a deposit is also asked for as security.
  • Information:

    trading businesses

    If you have a trading business you should contact us for advice.

  • If you are self-employed, your business is likely to be closed. If your business has  assets which are not exempt,  the official receiver is likely to decide that the assets should be sold to repay your creditors. If your business has few or no assets, you may be able to start trading again after going bankrupt. However, you may find this difficult if your type of work involves using credit of £500 or more. Credit can include being given time to settle bills, such as 30 ­day invoices. A business lease may be considered as an asset. There may also be terms and conditions in a business lease which means the landlord can end the agreement. Contact us for advice.

Warning:

possible risk to employment

If you handle money, your employment could be at risk. If you work in the finance industry, you will lose your consumer credit licence.

  • Depending on the type of job that you do, your employment may be affected. Always check your contract of employment to see if bankruptcy is mentioned. You can also ask your staff welfare officer or trade union if you are uncertain. If you belong to a professional body which does not allow you to be bankrupt, you could be struck off. For example, this may affect solicitors and accountants.
  • Under the rules in the Consumer Credit Act 1974, your creditors will usually have to keep sending you annual statements, as well as arrears and default notices in a set format. This will happen even when you are bankrupt but should stop once you are discharged. Don’t worry; this does not mean that there is a problem with your bankruptcy.  If you receive other letters demanding payment, you should take this up with the official receiver and contact us for advice.  

Information:

Individual Insolvency Register

See Useful contacts towards the end of this fact sheet for details of the Individual Insolvency Register.

  • Even after the bankruptcy period you may find it difficult to obtain credit. The bankruptcy order will be registered with credit reference agencies for at least six years. Even after this time you may be asked whether you have ever been bankrupt, when applying for some credit, particularly a mortgage. Details of your bankruptcy are also kept on the Individual Insolvency Register for three months after the date of your discharge from bankruptcy.
  • Details of your bankruptcy are usually published in a trade paper called ‘The Gazette’. Your bankruptcy details will not usually appear in your local paper. However, the official receiver can decide to advertise if, for example, they think you have not told them about all your assets.

Offences

Whilst you are bankrupt it is a criminal offence to:

Extra advice:

company directors

If you are made bankrupt you have  to resign as a director with 21 days of the bankruptcy order being made. You are also not allowed to 'shadow direct'. Contact us for advice.

  • take out credit of £500 or more without telling the lender you are bankrupt;
  • use a new business name without revealing the name you were made bankrupt under;
  • act as a director of a limited company without permission; or
  • act as an insolvency practitioner.

Bankruptcy restrictions orders

You will usually be discharged from bankruptcy after one year. See the later section, Discharge. The court has the power to make a bankruptcy restrictions order against you if the official receiver feels your behaviour has been dishonest in some way, or if there has been ‘unfit’ conduct.

Unfit conduct can include:

  • not keeping records that could explain a loss of money or property;
  • gambling;
  • trading whilst you knew you couldn’t pay your debts;
  • causing your debts to increase by deliberately not managing your business properly;
  • taking out credit which you knew you couldn’t repay;
  • giving away your assets or selling them at less than their value to avoid them being included in the bankruptcy; and
  • paying some creditors rather than others.

Information:

unfit conduct

This is not a complete list of types of unfit conduct. If you are unsure whether a certain type of behaviour may be considered to be 'unfit', contact us for advice.

A bankruptcy restrictions order means you are not allowed to:

  • apply for credit of £500 or more without telling the lender about the order;
  • continue to run a business in a different name from the one in which you were made bankrupt, without telling those you want to do business with the name under which you were made bankrupt;
  • become an MP or local councillor;
  • be a director of a limited company or form a new limited company without permission; or
  • be an insolvency practitioner.

Warning:

Individual Insolvency Register

A bankruptcy restrictions order can last for between 2 and 15 years and will appear on the Individual Insolvency Register. See Useful contacts at the end of the fact sheet. This is a searchable public register including your name, address, date of birth and an outline of the reasons why you have a bankruptcy restrictions order, and how long this will last. If you break the order it can be a criminal offence.

Warning:

criminal proceedings

A bankruptcy restrictions order does not stop the official receiver from taking criminal proceedings for an offence, such as selling goods you have on a hire-purchase agreement, or for putting false information on a loan application.

 

Discharge

You will be automatically discharged from your bankruptcy after one year whatever you owe. If you applied for bankruptcy online you should get a letter from your official receiver to confirm that you have been discharged. If a creditor made you bankrupt and you need proof that you have been discharged, you need to apply to court and pay a fee for a certificate of discharge. Contact us for advice.

You can also apply to have your bankruptcy ‘annulled’ (that is, cancelled). This can be done for example, if you have paid all the debts and expenses of the bankruptcy in full, or you can show that a bankruptcy order should never have been made. If you want further information on these points, contact us for advice.

Warning:

delayed discharge

If you do not cooperate with your official receiver, for example if you refuse to provide information that they ask for, they may stop your discharge going ahead. Contact us for advice.

Which debts do I still have to pay after bankruptcy?

Although your liability for most debts will be written off once you are discharged, there are exceptions to this. Even after discharge you will still be personally liable for: 

Information:

powers of the court

For arrears of maintenance payments ordered by a court, Child Support Agency arrears, Child Maintenance Service arrears and debts resulting from personal injury claims, the court has the power to order that you do not have to pay all or part of these.

  • magistrates’ court fines;
  • student loans;
  • arrears of maintenance or maintenance payments ordered by a court;
  • Child Support Agency and Child Maintenance Service arrears;
  • debts you built up through fraud; and
  • debts you owe as a result of a personal injury claim against you. 

This is not a complete list of the debts that you will still have to pay after your bankruptcy ends. Contact us for advice.

Alternatives options

Individual voluntary arrangements

Information:

keeping to the IVA

An IVA will usually last for up to five years. If you do not keep to the arrangement, the insolvency practitioner or your creditors can apply to make you bankrupt instead.

An individual voluntary arrangement (IVA) is a formal arrangement to repay your creditors part of what you owe and can be a way of avoiding bankruptcy. You need to be able to raise a lump sum to pay the creditors or be able to make regular payments from your income to your creditors.

To arrange an IVA you need to find an insolvency practitioner prepared to work for you. The insolvency practitioner prepares a proposal to put forward to your creditors. If the creditors who are owed 75% in value of your debts, who choose to vote, agree to accept the proposal then the IVA is put in place.

Insolvency practitioners’ fees can be expensive and they may want some payment in advance.It is worth asking them for an initial free meeting to discuss whether an IVA is appropriate.

Information:

setting up an IVA 

If you are interested in setting up an IVA, contact us for advice. We may be able to refer you on to an insolvency practitioner from a list of providers that have agreed to follow special guidelines called the 'IVA protocol'. We will be able to discuss an IVA with you, as well as advising you on what other options you may have for dealing with your debts.

Warning:

avoid unnecessary fees

Be careful of companies who offer to put you in touch with an insolvency practitioner for an up-front fee. You can contact an insolvency practitioner yourself without paying a fee to a third party.

 
 

Debt relief orders

A debt relief order (DRO) is a way of dealing with your debts if you have a low surplus income and few assets.A DRO may be able to help you if:

See our fact sheet:

Debt relief orders (DROs).

  • you do not own your home;
  • your total assets are worth £1,000 or less;
  • you have £50 a month or less spare income to pay your creditors; and 
  • your total debts are £20,000 or less.
If your DRO application is successful then most of your creditors will be unable to take action to recover your debts for 12 months.The debts are then written off after the 12 months are up.

Informal arrangements and debt management plans

See our fact sheet:

Debt management plans (DMPs).

If bankruptcy or an IVA are not suitable options, you may be able to make informal arrangements with your creditors.Our self-help pack explains how to negotiate with your creditors.If you do not have a copy of our pack, contact us for advice.
If you would like an organisation to act on your behalf to negotiate affordable payments, you might want to consider a free debt management plan (DMP). This is a repayment schedule for unsecured debts.
 

Useful contacts

The Individual Insolvency Register
The Insolvency Service
Phone: 0300 678 0015
Online search through the Insolvency Service website.
 

The Insolvency Service
Phone: 0300 678 0015
Go to www.gov.uk and search for 'Insolvency Service'.