What is bankruptcy?
A creditor can issue a bankruptcy petition against an individual if they are owed a debt of more than £5,000. Alternatively, an individual can present their own bankruptcy petition by applying online and declaring themselves bankrupt. Once a bankruptcy order is made, the individual’s assets vest with the Trustee in Bankruptcy and these may include the bankrupt’s interest in the matrimonial home. The Trustee once appointed will deal with the realisation of the debtor’s assets and should sufficient funds be available, distribute these to creditors.
A statutory demand can be issued by a creditor against an individual in an attempt to recover a debt owed of more than £5,000. The Statutory demand needs to be served in a prescribed manner and often a processing server will perform this role on behalf of a solicitor. The statutory demand needs to be in a form and a witness statement is completed following its presentation.
The individual will have a period of 21 days in which to respond to the statutory demand and has one of the following options:-
- Do nothing
- Pay the outstanding debt or negotiate a settlement time period to repay
- Apply to have the statutory demand set aside and this will involve a court hearing at which the disputed debt will be heard.
If a creditor has obtained either a judgement debt or the statutory demand does not result in the debt being repaid, then a bankruptcy petition will be presented against the debtor. Again, a solicitor will assist in this process to ensure that the forms are presented in accordance with the Insolvency Rules.
In presenting the petition, the court will need to be shown evidence that the statutory demand has been issued by filing a certificate or being provided with a statement from either the bailiff or sheriff to demonstrate that a judgement order was made and that they could not recover sufficient assets to satisfy the debt.
The court fees for making someone bankrupt are £990 for the petitioners deposit and £280 for court costs. Once the petition is lodged in court a hearing will be set and the bankruptcy petition will be served on the debtor.
Debtor’s Online Bankruptcy Application
An individual can petition their own bankruptcy by applying online at a cost of £680. It is important that if you declaring yourself bankrupt, then you will need to ensure that you provide details of your income and expenditure for example wage slips, pensions, council tax bills and credit card information.
Whether an individual presents their own petition or whether a bankruptcy petition is presented by a creditor a bankruptcy order will be made.
Once a bankruptcy order is made, the case is initially handled by the Official Receiver who will become the Trustee in bankruptcy. The bankrupt will have a duty to cooperate with the Official Receiver and depending on the level of debt may be required to attend an interview with the Official Receiver.
The Official Receiver will circulate to the debtor a bankruptcy questionnaire which will need to be completed and returned. The booklet focuses on the bankrupt’s assets including details of the matrimonial home; any other assets; details of income and a list of creditors. It will also identify whether there has been any asset disposals in the last five years or any transactions with connected parties.
Effects of Bankruptcy
Ordinarily, an individual will remain bankrupt for a period of one year until they receive discharge. There are various obligations placed on the bankrupt including co-operating with the Trustee, delivering all books and records and attending any set meetings. Failure to co-operate with the Trustee may lead to a suspension of discharge for a specific time or until the Bankrupt complies.
Whilst bankrupt an individual is unable to act as a Company director and will be unable to obtain credit. There are various bankruptcy offences which may lead to the bankrupt receiving a Bankruptcy Restriction Order (BRO) for a period of between 2-15 years.
Meeting of Creditors
Based on the information gathered at the interview, the Official Receiver will decide within the first 12 weeks in office, whether it is appropriate to convene a meeting of creditors for a Trustee to be appointed. If there are creditors with over 50% in value of claims requesting the appointment of a particular Insolvency Practitioner then the Official Receiver may make a Secretary of State of Appointment.
Alternatively, a meeting of creditors can be requisitioned if there are more than 25% of creditors in value requesting a meeting to be convened in order to appoint an independent Trustee.
At the meeting of creditors, a Trustee will be appointed by a simple majority of those creditors either attending the meeting or voting by proxy.
The Bankrupt’s Estate
All property belonging to the bankrupt at the commencement of Bankruptcy vests in the Trustee on appointment. This includes all assets of the Bankrupt including their interest in the matrimonial home.
The Trustee will have a duty to examine any potential antecedent transactions which may have occurred which may extend to the period of up to 5 years prior to the presentation of the bankruptcy petition. This can include any transfers of assets at any undervalue or any preferences to connected or unconnected parties. The Trustee will seek to investigate these transactions and attempt to attack them in order to benefit the estate.
In addition, the bankrupt has a duty to report to the Trustee any after acquired property and any windfalls (e.g. national lottery) which may be received following bankruptcy. There could also be a potential Income Payments Arrangement or Order (IPO/IPA) which may result in the bankrupt making contributions into the estate for a period of up to 3 years post-bankruptcy.
There are however various assets which are excluded from the estate which may include:-
- Tools, books, vehicles which are necessary for the bankrupt’s trade
- Household affects for basic domestic needs
- Approved HMRC pensions
The Trustee has a period of three years from commencement of bankruptcy to realise the bankrupt’s interest in the matrimonial home. This is obviously a sensitive matter as there are other parties affected by this process e.g. spouse, civil partner, children and former spouse.
If there are children under the age of 18, the Trustee will be unable to realise the property for the first year of Bankruptcy. The equity of the bankrupt will be dependent on whether the home is held in joint names; tenants in common; the bankrupt’s sole name; sole name of the non-bankrupt spouse and there is much case law surrounding the realisation of the matrimonial home as it is such a sensitive issue.
In most cases, the spouse will be approached first in order to buy the bankrupt’s share of the matrimonial home and failing that a voluntary sale of the property may be sought. There may be occasions when an application to court will need to be made for repossession and sale and the court will need to consider the rights of occupation by third parties.
Finally, there are exceptional circumstances when the Trustee may be unable to realise the Bankrupt’s interest for example, elderly mother, unforeseen illnesses, adaptation of the house for disability and these will need to be proven to the court.
Discharge of Bankruptcy
The bankrupt is automatically discharged from bankruptcy after a period of one year provided there has been no application by the Trustee for a suspension. On discharge, the assets remain vested with the Trustee and the Trustee will remain in office.
The Bankrupt might wish to seek an annulment of the Bankruptcy Order on one of the following bases:-
- That the Order should never have been made and they were in fact solvent.
- That the bankruptcy debts can be paid in full.
- That creditors approve the basis of an Individual Voluntary Arrangement (IVA) as it will result in a better outcome for creditors as opposed to remaining in Bankruptcy.
Trustee Final Meeting of Creditors
Once all assets have been realised and any distributions paid to creditors, the Trustee will convene a final meeting of creditors in order to obtain release from office and agree the final receipts and payments account.