A Bankruptcy Guide: The definitive guide 2021
Bankruptcy is a formal insolvency process which is ratified by the Court in England and Wales. Upon the making of a Bankruptcy Order the bankrupt’s assets and liabilities become part of an estate which is initially presided over by an Official Receiver in the role of the Trustee of the bankruptcy estate.
An Official Receiver is a Government employee who works for the Insolvency Service and is licensed to take insolvency appointments. Following a court making a Bankruptcy Order by default an Official Receiver responsible for the geographical area in which the bankrupt lived or carried on their business will initially be appointed trustee of the relevant individual’s bankruptcy estate.
If either at the instigation of the Official Receiver or following a request from creditor(s) of the requisite value the Official Receiver is replaced as trustee of the bankruptcy estate, a licensed insolvency practitioner in private practice can be appointed as trustee of the bankruptcy estate in one of two ways. The first, and most common, is when an estate has significant or complex assets, the Official Receiver will pass the estate to a licensed insolvency practitioner who is on their rota. As with the Official Receiver, the Trustee will be based in the bankrupt’s geographic region.
The second method of appointment is for the Trustee to be appointed at the request of the bankrupt’s creditors. This usually happens when there are specific areas the creditors desire their preferred Trustee to review.
In all scenarios, the Official Receiver / Trustee will look to realise the bankrupt’s assets for the benefit of creditors.
What does Bankruptcy mean?
Bankruptcy is formal legal process, and a Court must be satisfied that the individual who is the subject of a petition from a creditor for a Bankruptcy Order is insolvent and cannot pay their liabilities as and when they fall due.
The bankrupt will be an undischarged bankrupt usually for a period of one year, although the period in which bankrupt remains undischarged can be extended on an application of the trustee of the bankruptcy estate to the court if the trustee of the bankruptcy estate is not satisfied that the bankrupt has co-operated sufficiently with his enquiries. During the period that the bankrupt remains undischarged, with certain exceptions, all assets of the bankrupt will vest in the bankruptcy estate for the benefit of creditors.
Notwithstanding the bankrupt’s discharge from bankruptcy, the Official Receiver or any other trustee appointed to administer the bankruptcy estate will continue to deal with the realisation of any assets and the completion of investigations so as to identify all creditors and any undisclosed assets or transactions by the bankrupt which may be challenged by the trustee. Once all this work is concluded, the estate will be closed.
Who can be made bankrupt?
Any individual can be made bankrupt, and this includes an individual who is the proprietor of a sole trader business. Bankruptcy does not apply to limited companies, which instead may become subject to insolvency procedures specific to companies, with compulsory liquidation being the nearest equivalent to bankruptcy.
You can be declared bankrupt either by petitioning for your own bankruptcy, or by a creditor petitioning for your bankruptcy. In both scenarios the Court will wish to satisfy itself that you are formally insolvent and, in particular, that you cannot pay your debts as and when they fall due.
Is bankruptcy right for you?
This will entirely depend on your circumstances. If, for example, you have significant liabilities and no assets, it is likely that a bankruptcy will be the best resolution for you. However, if you are a sole trader with complex trading arrangements, another process, such as an IVA (Individual Voluntary Arrangement), may be better suited to deal with your liabilities and result in a better return for your creditors.
If you are considering bankruptcy, you should seek advice from a licenced insolvency practitioner who will guide you through all the options available to you and the positives and negatives of each process in your circumstances.
What are the costs of going bankrupt?
The process for filing for your own bankruptcy in England and Wales is to submit an online application through the gov.uk website (Apply for bankruptcy – GOV.UK (www.gov.uk)).
The application fee is currently £680 and covers the Court fee and a deposit towards the costs of the Official Receiver, who will be appointed as trustee over your bankruptcy estate.
In Scotland, applications are made to the accountant in Bankruptcy (How to Apply | Accountant in Bankruptcy (aib.gov.uk)). Dependant on the nature of your affairs, the fees for the application are either £150 or £50.
In Northern Ireland an application can be made to the Court or the Insolvency Service to apply for bankruptcy. There are three fees involved – a deposit of £525 towards the costs of administering your estate, a court fee of £151 and a solicitor’s swearing fee, usually around £7.
In England, Wales and Northern Ireland you may be able to mitigate some elements of the fees as part of the application process, although usually the full fee is required.
If you are seeking to make someone bankrupt who owes you money, it is usual to instruct a solicitor as you will need to apply to Court for a Bankruptcy Order. The solicitor will charge fees for this work, together with their disbursements, which will include Court Filing fees and any deposit payable.
Advantages of going bankrupt
The main advantage of filing your own petition for bankruptcy is that it formalises your status as insolvent and introduces either an Official Receiver or a licensed insolvency practitioner who will act as trustee and take control of your estate in a professional manner. Unlike a High Court Enforcement Officer, the trustee of the bankruptcy estate is unlikely to attend at your personal residence except in exceptional circumstances or by appointment. This can therefore ease the emotional distress insolvency can bring to you and your family members.
If you are a property owner, and you own your property jointly with your partner, it is unlikely that, without the consent of both joint owners, a court will grant an order for possession and sale of that property in favour of the trustee of the bankruptcy estate within one year of the making of your bankruptcy order. This is to give you breathing room to find alternative accommodation.
Whilst certain debts, such as Student Loans, are excluded from bankruptcy proceedings, the remainder of your debts will be frozen and will stop accruing contractual interest, and your creditors will be obliged to correspondence with your Trustee regarding the monies owed to them, instead of contacting you.
If you comply with the requests of the Official Receiver and Trustee in respect of your bankruptcy estate, they are unlikely to contest your automatic discharge from bankruptcy after one year. In these circumstances, once you are discharged from bankruptcy, you will no longer be subject to the legal restrictions which apply to an undischarged bankrupt. However, notwithstanding your status as an undischarged bankrupt, the trustee of the bankruptcy estate will still have a duty to deal with the assets and liabilities in the bankruptcy estate.
Whilst each case must be considered on its merits, usually funds held in pension schemes are not deemed to be part of a bankruptcy estate.
Household items, such as televisions, furniture, clothing and so forth, which are not of exceptional value ( eg which are not valuable antiques ) are usually deemed to be exempt assets and do not need to be sold by the trustee of the bankruptcy estate. If your motor vehicle is of low value and essential for your employment, it is possible that it will also be deemed an exempt asset.
Disadvantages of going bankrupt
All the assets you own, and your interest in jointly owned assets, at the point of bankruptcy, with certain exceptions, vest in your bankruptcy estate at the point you are declared bankrupt. As a result, the trustee of the bankruptcy estate will look to realise any value in these assets for the benefit of your creditors – an example of such an asset would be your interest in the equity in your home.
You will not have any control over the sale process, nor any ability to sell these assets yourself, although your Trustee will work with you wherever possible to maximise returns for your creditors.
You are also obliged to engage with the Official Receiver and Trustee as they may reasonably require, including completing questionnaires and attending for interview. Failing to take such steps can result in your discharge from bankruptcy being suspended, thereby preventing you from exiting bankruptcy, and can in extreme circumstances result in your arrest. It is therefore important you engage with the Official Receiver and Trustee.
As a result of being declared bankrupt, you are automatically ineligible from being a company director, and must resign from office immediately. A bankrupt’s failure to cease to act as a director or manager of a limited company can result in the Official Receiver seeking an order of court disqualifying the bankrupt from acting as director for a period beyond the date of an automatic discharge from bankruptcy.
As an undischarged bankrupt you will also be unable to obtain credit from financial institutions without advising those institutions that you are an undischarged bankrupt, and you will likely only be able to obtain restricted credit for the foreseeable future following bankruptcy.
You should also consider your employment contract as it may be a requirement for you to disclose your bankruptcy to your employers. In certain industries, such as the financial services, declaring bankruptcy can result in the immediate termination of your employment. This is particularly likely in sectors which are regulated and / or require you to hold a licence or similar.
What is the bankruptcy process?
Bankruptcy commences with the debtor or one of their creditors petitioning for a Bankruptcy Order. Where the bankrupt makes the application, this is done by way of an online submission. For a creditor to obtain a bankruptcy order, a Court hearing must be held.
After the order is made, the Official Receiver will automatically be appointed trustee over the bankrupt’s estate.
The Official Receiver / Trustee will try to make immediate contact with the bankrupt to establish if there are any perishable assets (such as food stock) or matters of risk (such as part completed construction sites) that require immediate intervention to preserve value and minimise risk.
The Official Receiver / Trustee’s staff will make all necessary statutory notifications and commence their investigations, which will usually involve interviewing the bankrupt. Once the interview process has been completed, all at risk assets have been dealt with and so forth, the Official Receiver / Trustee will undertake their statutory investigations and take steps to value and, if appropriate, realise all the bankruptcy assets.
If the bankrupt does not engage with the Official Receiver / Trustee, it is likely the trustee will seek to suspend the bankrupt’s discharge from bankruptcy.
Beyond asset realisation and investigation work the Official Receiver / Trustee will report annually to the bankrupt’s creditors as to their progress with administering the bankruptcy estate.
Once all investigations are concluded, and all realisations have been concluded, the Official Receiver / Trustee will settle the costs and expenses of the estate, distribute residual funds to the bankrupt’s creditors, and issue a final report to creditors. Assuming no creditors object to the report, the estate will close approximately eight weeks later.
What happens at the end of bankruptcy?
When a bankrupt receives their discharge from bankruptcy, they are free from the legal restrictions bankruptcy imposes – for example they can once again become a director of a limited company. It should be noted that bankruptcy will remain on your credit file and may still affect your ability to obtain credit.
What happens to your assets when you go bankrupt?
The majority of your assets, with some exceptions such as household items, will automatically vest in the bankruptcy estate. This includes both physical assets, such as property, equipment and so forth, and also intangible assets such as cash at bank, investments, shareholdings and rights of action and similar.
Your Official Receiver or Trustee in Bankruptcy will assess each asset on its own merits to establish if it is cost effective to realise for the benefit of your creditors. If so, they will take steps to dispose of the assets, with all realisations being used to settle the costs of your bankruptcy and to distribute funds for the benefit of your creditors.
Will you lose your home?
Not necessarily. If your property has no or minimal equity and your Official Receiver / Trustee has independently verified the position, repossession proceedings are unlikely to take place as this would incur unrecoverable costs and would only be to the detriment of your creditors as these costs would be borne by other assets, if any, within your estate.
However, if you do have equity within your property, the Official Receiver / Trustee will seek to explore with you if there is a third party, such as a joint owner, your partner, family member, friend or similar, who may wish to acquire your beneficial interest. If such a transaction can be agreed by all parties, you would continue to reside in your property and the value of the equity would paid over to the Trustee. You would thereafter need to make arrangements with the party who acquired your interest regarding the terms of your continued occupancy.
If your total creditors, together with statutory interest and the costs of the bankruptcy proceedings, are significantly less than the equity in your property, you may be able to remortgage the property to settle these amounts thereby allowing you to apply for the annulment of the Bankruptcy Order on the grounds of payment in full or to propose an IVA in full and final settlement of your debt, both of which could see you retaining the property.
Whilst the Official Receiver and/or Trustee will try to work with you to achieve a release of your equitable interest, they will need to be confident substantial progress is being made to this end, as ultimately, failing this, they will be obliged to repossess and sell your property if a suitable settlement is not forthcoming.
It is likely that a Court will ultimately grant an order for possession and sale, and you will have to vacate your property which will then be sold.
When will your bankruptcy end?
Assuming you comply with all the reasonable requirements of the Official Receiver / Trustee, and have not been party to any transactions or financial misconduct which would result in restrictions being pursued, you will receive a discharge from bankruptcy automatically after one year, and you will no longer be an undischarged bankrupt.
It is important to note that all assets, including any that are not known to the Official Receiver and Trustee, will remain in the bankruptcy estate following your exit from bankruptcy and the estate will continue to exist until the Official Receiver / Trustee is satisfied all assets have been realised and all investigations concluded or exhausted. Depending on the complexity of your affairs, the bankruptcy estate could exist for a couple of years, or could in some circumstances still exist a decade after you were declared bankrupt.
It is therefore important to engage with your Official Receiver / Trustee and provide them with full disclosure of your affairs, as this will significantly reduce the work required in the bankruptcy, and therefore likely shorten its duration.
Do you have to tell your employer about your bankruptcy?
This will depend on the nature of work you undertake and the terms of your contract of employment. It is possible that your contract may require you to inform your employer. In particular, if you work in a regulated sector or hold any form of licence or similar, it is highly likely you be obliged to report this not only to your employee, but also to the provider of your licence or registration.
You should therefore consult your employment contract and, if relevant, your regulatory body’s code of conduct to confirm the position. If at this stage it is not clear to you, you should consider seeking advice as whilst bankruptcy may terminate your employment, the consequences of not disclosing your bankrupt status could be more severe.
Will you lose your job if you go bankrupt?
This will again depend on the terms of contract of employment and the sector you work in. In some professions bankruptcy will effectively result in your automatic dismissal. Whilst you may have a right of appeal, the prospects of successfully appealing your dismissal or proposed dismissal will depend on the nature of work you undertake, the terms of your contract, and if you are in a regulated field where being solvent is a prerequisite.
It is therefore essential to seek advice before declaring bankruptcy, to understand the possible ramifications it may have on your employment.
Can you carry on running a business?
The Official Receiver and Trustee are empowered to trade your business if they consider it appropriate and to the benefit of creditors. They may also agree that you superintend the business on their behalf to manage day to day operations, accounting to them for the profits generated.
This will likely only be allowed where you are demonstrating proper engagement with the Official Receiver and Trustee and there is a material benefit available from the proceeds of trade for the benefit of your creditors, after consideration of the costs of trade.
If you therefore wish to continue to trade following bankruptcy, proactive early engagement with the Official Receiver and Trustee is essential.
Will bankruptcy show up on your credit file?
Entering into bankruptcy will place you into default with all of your credit facilities. It is therefore likely that your creditors will record your default on your credit file. Additionally, your bankruptcy will be a matter of public knowledge and a register is maintained of bankrupt individuals which can be accessed at the Insolvency Service website. Your bankruptcy may also be advertised in the London Gazette.
It is therefore highly likely that credit files will reflect your bankruptcy, and indeed it will likely be a required disclosure in any contracts that you enter into. As a result, your ability to obtain credit will be impacted by declaring bankruptcy.
How can you check your credit file?
You can check your credit file by opening an account with a credit reference agency. Many provide this service for free and can provide you with your current credit ranking. You can identify such services by searching for “credit check” or similar keywords in your preferred search engine.
Cancelling your bankruptcy (annulment)
It is possible that you may be declared bankrupt when you have sufficient assets to settle your affairs in full. Equally, you may have a third party, such as a family member who has the means and desire to settle your indebtedness.
Accordingly, you can make application to Court for an annulment of your bankruptcy. To satisfy the grounds for annulment, you will be required to settle all debts in full, together with statutory interest and the costs and expenses of your bankruptcy proceedings. Bankrupts have in the past attempted to bypass the requirement to settle the costs and expenses of bankruptcy proceedings by settling their creditors debts directly, but it is a matter of law that the Official Receiver’s and Trustee’s costs must also settled.
If you have not yet entered into bankruptcy and consider you may be able to settle your debts in full, or indeed can make a significant offer of settlement, you should seek immediate advice from an Insolvency Practitioner as an alternative process such as an IVA may be more appropriate for you and will likely be a less expensive resolution of your affairs.
If you are in bankruptcy already, you should still consult an insolvency practitioner who will be able to assist you with any annulment process. In particular, they will seek to ensure that the Official Receiver and Trustee restrict their work as much as possible to minimise their costs which you will need to settle.
Once a settlement has been agreed in principle, the Court will likely make an Order requiring the necessary funds to be paid to the Official Receiver and Trustee to discharge their costs and settle creditor claims, and on completion of this process your bankruptcy will be annulled.
As result it will be as if your bankruptcy never took place, and it details of the bankruptcy proceedings will effectively be removed from your record.
Will your bankruptcy be public knowledge?
Bankruptcy proceedings are a matter of public record throughout the period you are in bankruptcy. The government maintains an online register (Search the bankruptcy and insolvency register – GOV.UK (www.gov.uk)) of both bankruptcies and IVAs, and your details will remain on the register until shortly after you are discharged from bankruptcy at which point they will be removed.
Where a meeting of your creditors resolves to appoint a Trustee in Bankruptcy over your affairs (as opposed to the Official Receiver) the Trustee must file notice of their appointment in these circumstances with the London Gazette, which is available online and will remain online indefinitely.
If the Trustee or Official Receiver convenes a meeting of creditors during the course of your bankruptcy, which they are entitled to do, notice of this meeting would also be placed in the Gazette,
In addition, as you will be declared bankrupt by order of the Court, a copy of the bankruptcy order will be held in the Court’s records which can be accessed on request.
Who will be told about your bankruptcy?
Whilst your bankruptcy is a matter of public record, normally members of the public do not check the London Gazette / Insolvency Register as a matter of course. However, many entities, such as banks, finance companies, reference agencies, employers and similar will check the bankruptcy register as a matter of routine.
The Official Receiver / Trustee will be obliged to liaise with your creditors, and will also write to any person they deem appropriate who can assist them in investigating your affairs and assets.
Practically, you should assume that business and professional contacts will be aware of your bankruptcy, but it is unlikely that your friends and family will be aware, unless they have been party to meetings regarding your finance or involved in historical transactions with you.
What happens to your belongings?
Personal items, such as jewellery, clothing, furniture, televisions, computers, children’s toys and so forth, unless they are of significant value, will likely be excluded from your bankruptcy estate and will not be realised for the benefit of your creditors.
A Trustee may sell high value items you possess. For example, if you are the owner of a vintage record collection of significant value, this may be realised for the benefit of your creditors.
Can you stop your goods from being sold?
If you are a sole trader, initially the Official Receiver or Trustee will consider the value of your stock in hand and may consider it appropriate to arrange for its immediate uplift and sale, particularly if the stock in question is perishable, such as food or similar products. They will also consider the level of stock you hold as if it is significant and more than you would reasonably require to trade, it is likely they will require it to be sold.
However, as noted above, the Official Receiver and Trustee may consent to you trading, in which case your goods would likely be retained in order that you can trade.
For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk