If an individual has debts of £5,000 or less and at least one judgement recorded against them, he/she may apply to their local County Court for an Administration Order to be made. Usually the debtor will be examined, in private, by the District Judge, who will then decide whether to grant the Order. If the Order is made, then the debtor makes a fixed regular payment to the Court. The Court then distributes payments to creditors, on a pro-rata basis.
After Acquired Property
Any asset acquired by a bankrupt person, during the period of bankruptcy, could, in theory, be seized by the Official Receiver/Trustee in Bankruptcy. It would be most unwise for a bankrupt person to purchase a car, for example. A bankrupt person is expected to live a modest lifestyle during the bankruptcy and is allowed to keep as much of his/her income as is needed to provide a reasonable standard of living.
Replacement of worn household appliances, etc would not be classed as After Acquired Property. However, any item of significant value could be so classified.
In recent years the increase in personal indebtedness has been seen by many people as a ‘growth industry’ and, unfortunately, many more people are now providing ‘advice’ on debt and bankruptcy. Obviously, whilst many such advisers are good, caring individuals, there are some who simply play on the misfortune and vulnerability of people in financial difficulty, often charging exorbitant fees, in the process.
Many ‘ambulance chasers’ check public records of County Court Judgements, Bankruptcy Petitions and Bankruptcy Orders. They then mail shot the debtors involved, offering various services and ‘solutions’ to the problem. Our advice is to be very wary of such people, as many simply pray on the vulnerable.
Annulment of a Bankruptcy Order
There are three circumstances in which a Court may annul a Bankruptcy Order:
1. If the Order should not have been made
2. If the debts and costs of the bankruptcy have been paid in full, or guaranteed to the satisfaction of the Court.*
3. If creditors accept proposals for settlement under an IVA.
* Currently, and as a result of a recent case (Halabi v London Borough of Camden & Another/14 February 2008), Courts will not grant an annulment where it is based on a solicitors undertaking. It will, however, grant an annulment to take effect at a future date once the court is satisfied the debts and costs have been paid.
An application for annulment can be made whether or not the bankrupt person has been discharged from bankruptcy. The effect of an Annulment Order is to return the individual to pre-bankruptcy status.
Assets of the Bankrupt
Any assets owned by the bankrupt person, other than those described under ‘Exempt Property’, may be seized by the Official Receiver/Trustee in Bankruptcy. The term ‘assets’, includes property or items located abroad, as well as in this country.
We have spent countless hours over many years researching which accounts are available to those in bankruptcy. Little assistance is provided by banks and building societies or indeed by the British Bankers Association. At the time of preparing this Fact File, most banks and building societies offer basic account facilities, which require no credit scoring. Unfortunately, however, often the attitudes of those at branch level affect whether banking facilities are accessible. Our advice is to make an appointment with your local branch and explain your circumstances immediately.
As and when further information becomes available in respect of banking facilities it will appear in our News Bulletins.
There are several offences a bankrupt person may commit, the most common of which are
• the failure to disclose assets
• to conceal assets
• failure to account for loss of property
• failure or refusal to make the required documents and records available to the OR (Official Receiver)
• destroying books and records
• omitting to give a full and frank disclosure to the OR/Trustee in Bankruptcy
• fraudulent disposal of property
• obtaining credit during the bankruptcy, without disclosing his/her bankrupt status.
Whilst, as a result of the Enterprise Act, the bankrupt may still be automatically discharged within 12 months of the Bankruptcy Order being made, the OR could apply for a Bankruptcy Restriction Order (or Undertaking), for a period of between 2 and 15 years, depending upon the severity of the offence. The bankrupt person could also have his/her discharge suspended if the OR was dissatisfied with his/her conduct and required additional time to investigate his/her affairs.
Bankruptcy Restriction Orders / Undertaking
The Bankruptcy Restriction Order is a relatively new concept, being one of the provisions of the Enterprise Act, introduced to deal with dishonest, reckless and culpable bankrupts. The purpose of a BRO is to protect the public interest, not to punish.
Bankruptcy Restriction Orders may be obtained by the Official Receiver for a period of between 2 and 15 years, depending on the severity of the offence. These BRO’s will restrict the bankrupt, for instance, from being a Company Director, obtaining credit in excess of £500 without disclosing his/her bankrupt status, becoming an MP or JP and are also expected to impact upon professional qualifications and trading in any other name other than the name in which the Bankruptcy Order was made.
A BRO may only be obtained for an offence committed after 1 April 2004.
A BRO may be obtained against the debtor who has been reckless (2-5 year BRO), culpable (5-10 year BRO) or dishonest (maximum 15 year BRO).
The criteria for the making of a BRO includes having been bankrupt within the previous 6 years, gambling, failure to co-operate with the Official Receiver, making preferential payments or disposing of assets at undervalue.
The Official Receiver must apply for a BRO before the bankrupt receives his/her automatic discharge (in most cases on the first anniversary of the Bankruptcy Order being made).
A Bankruptcy Restriction Undertaking is identical to a BRO but is reached by agreement with the debtor, rather than by Application to the Court.
Certificate of Discharge
Whilst discharge is automatic, the debtor will not receive any notification that he/she has been discharged.
If proof of discharge is required, then an application should be made to the Court where the Bankruptcy Order was made, quoting the bankruptcy date and number. The current charge for a Certificate of Discharge is £60 (as at March 2008).
If the discharged bankrupt person is to apply for a mortgage, then he/she would be well advised to obtain a Certificate of Discharge as such a document is most likely to be required by the new mortgage lender.
If confirmation of discharge (but not a Certificate), is required, then such confirmation is available from the Official Receiver.
Change in Circumstance
If a bankrupt person experiences a change in circumstances during the period of bankruptcy, ie an increase in salary (other than normal cost of living rise), then there is an obligation upon him/her to advise the Official Receiver/Trustee in Bankruptcy.
We are very sceptical about anyone borrowing more to pay off existing debt. Generally those companies offering consolidation loans charge a very high rate of interest as, by definition, they are lending to a ‘higher risk’ borrower.
Arrears or unpaid Council Tax is a debt which is included in bankruptcy (providing the Council have not obtained a Liability Order). However, Council Tax is generally a joint debt of husband and wife (providing they reside at the same property) and, if one party to the debt goes into bankruptcy, the debt becomes the sole responsibility of the non-bankrupt spouse.
It should also be noted that Councils all over the country are using bankruptcy as a method of debt collection. Such action usually results in the debtor’s position becoming even worse. Anyone experiencing such action by a council should take the situation extremely seriously and seek advice immediately. We have vast experience in dealing with Council Tax bankruptcies.
Credit cards are a very convenient (and easy!) method of obtaining credit. The rates of interest charged by credit card companies vary, but are generally quite punitive for those people who do not pay off the balance, in full, each month.
Some credit card companies do offer a facility which enables the borrower to transfer balances from other cards, at a low rate of interest or with no interest charge at all, usually for a limited period of time.
Anyone coping with a relatively small level of debt, may benefit by taking advantage of such offers, providing, of course, that the terms are adhered to and balances are reduced within the specified period and no further credit is obtained.
Credit Reference Agencies
There are three main Credit Reference Agencies:
Equifax, Credit File Advice Centre, PO Box 1140, Bradford BD1 5US
Experian, Consumer Help Service, PO Box 8000, Nottingham NG80 7WF
Call Credit, Consumer Services Team, PO Box 491, Leeds LS3 1WZ
Individuals may obtain copies of their Credit File by making application to any or all of the above. At the time of writing, the fee is £2 and we generally recommend sending a Postal Order, to avoid the delay while a cheque clears. Your credit file may also be accessible (at a cost) online.
Unfortunately, the Credit Reference Agencies will keep a record of a bankruptcy on their files beyond discharge. Currently the bankruptcy remains on the credit file for 6 years from the date of the Bankruptcy Order.
It is also likely that anyone with the same surname as the bankrupt, living at the same address, will be affected by that person’s bankruptcy. Whilst the Credit Reference Agencies refuse to accept that a husband and wife have independent financial status, they are, however, willing to place a ‘Notice of Disassociation’ on their records, to show that the financial circumstances of parent and offspring are separate.
If there are assets in the bankruptcy estate, then a Creditor’s Meeting will be called by the Official Receiver. This must take place within 3 months of the Bankruptcy Order being made. Such a meeting will also be called if the creditors of the bankruptcy make such a request to the Official Receiver.
If such a meeting is called, it is likely that a Trustee in Bankruptcy will be appointed to continue the administration of the bankruptcy and, in particular, to realise assets for the benefit of creditors.
If the bankrupt is requested to attend, he/she must do so. However, such a request is quite unusual and, other than when such a request is made, there is no obligation on the bankrupt to attend.
Any creditor owed £750 or more by an individual or partnership may issue bankruptcy proceedings. The debtor is not required to attend the Bankruptcy Hearing. However, if he/she does not plan to attend, we suggest, as a matter of courtesy, that the Clerk to the Court be advised that the debtor is aware of the proceedings, but does not, indeed, intend to be present at the Hearing or defend the action being brought.
If, of course, the debtor intends to defend the action, he/she must attend the Hearing.
Crown preference is abolished in all insolvency procedures. This means that all creditors – whether trade, personal or Inland Revenue and H M Customs & Excise will receive an equal share of any distribution (ie funds realised from the bankruptcy estate).
Debt Management Plans
There are numerous organisations, some more reputable than others, who offer the debtor the opportunity to make one payment of an agreed sum to them each month. They take their fees (usually between 10 and 20%) from that monthly contribution and then distribute the balance to creditors.
DMPs do not, generally, provide any element of debt forgiveness.
Anyone considering this method of dealing with their debt should seek independent advice (ie not just the advice provided by the Debt Management Company), to ensure that the best method of dealing with his/her financial problems is being followed.
Some Debt Management companies ‘encourage’ people to take advantage of the service they offer by claiming that they are able to substantially reduce the monthly payment the debtor is currently making to creditors. Whilst that may be so, the debtor will have to make that reduced monthly payment over a considerably longer period.
We have seen debtors who are in DMPs which will require them to make payments for over of 40 years, we have also seen individuals who have made payments into a DMP for over 2 years and the level of their debt has actually increased, due to interest and penalty charges.
Anyone with debts of £750 or more may submit his/her own petition for bankruptcy.
The fee to take such an action is currently £485.00 for an individual. From 6 April 2008 this will increase to £495.00. A debtor on low income or in receipt of certain forms of State Benefit may apply for a fee reduction. The fee may be reduced to a minimum of £335.00 currently (and £345.00 from 6 April 2008) if that application is successful.
A debtor wishing to submit his/her own petition should first obtain a Debtor’s Petition from his/her local County Court (the forms may also be completed online at www.insolvencydirect.gov.uk, however, an e-mail address and access to a printer are required).
Once the form is completed, an appointment should be made with the Court, to submit the Petition. At the Court, if the Petition is properly completed and the District Judge is satisfied with the information provided, he may not require to see the debtor, but will simply make the Bankruptcy Order, based on the information provided.
Immediately the Bankruptcy Order is made, the Court will advise the local Official Receiver, who will then contact the bankrupt person (usually within 7 days) and arrangements will be made for either a telephone or face to face interview.
Such an interview usually takes place within 14 days of the Bankruptcy Order being made. The interview duration will depend on the information provided and/or the complexity of the case.
Debt Relief Orders (DROs)
A Debt Relief Order is a new insolvency procedure which will provide debt relief for people in England and Wales who owe relatively little, have no income and no assets, to repay what they owe and cannot afford to make themselves bankrupt.
DROs are designed to give those who have debts of £15,000 or less, assets of less than £300 and surplus income of less than £50 per month, the opportunity to apply for an Order which will lead to the debts being discharged after one year. During that period, people who have a DRO will be protected from enforcement action by creditors and will be subject to similar restrictions to those in bankruptcy. Those whose financial circumstances improve during the Order period will be expected to make arrangements to repay their creditors and there will be civil and criminal penalties for those who abuse the system.
It will only be possible to obtain a Debt Relief Order by applying to the Official Receiver, through an approved intermediary and the Insolvency Service has set up a Working Group, comprising representatives from the advice sector, to look at the detail of how this will work.
The relevant Act has now passed through Parliament and is expected to be implemented in April 2009.
Debts excluded from Bankruptcy
Certain debts will not be included in a bankruptcy and will need to be paid, outside of the bankruptcy. Court fines, for example, will not be included in a bankruptcy and must be paid, as must maintenance payments and payments to the Child Support Agency or where the creditor has gained a Liability Order.
Debts to Spouse
If a person has borrowed funds from his/her spouse and then goes into bankruptcy, the spouse may claim in the bankruptcy but will be classed as a ‘last in line’ creditor. That is, he/she will only be repaid if all the other creditors in the bankruptcy, as well as the administrative costs of the bankruptcy, are repaid.
Discharge from Bankruptcy
From 1 April 2004, most people will receive an automatic discharge from bankruptcy after 12 months.
Some people may be discharged earlier, if the Official Receiver is satisfied that there are no further investigations of his/her affairs required. A bankrupt person cannot apply for early discharge as it is granted solely at the discretion of the Official Receiver.
Anyone already in bankruptcy at 1 April 2004 would have been automatically discharged on 1 April 2005, or on their due discharge date, whichever came earlier.
To explain, if a Bankruptcy Order was made on 10 December 2003, that person would have been discharged on 1 April 2005.
However, if a Bankruptcy Order was made on 10 February 2002, that person would have been discharged on 10 February 2005.
In regard to a second bankruptcy - if that Bankruptcy Order was made before 1 April 2004, then the bankrupt person could apply for discharge (discharge was not pre-Enterprise Act automatic for a second bankruptcy) on the 5th anniversary of the Bankruptcy Order being made. However, if the second Bankruptcy Order was made on 1 April 2004, then automatic discharge would have been granted on 1 April 2005.
Anyone having a second Bankruptcy Order made against them after 1 April 2004, may be subject to a Bankruptcy Restriction Order (BROs can only be obtained for an offence which has taken place after 1 April 2004).
To explain – someone who had a Bankruptcy Order made against them on 20 June 1998 would have received an automatic discharge on 20 June 2001. If that person had a second Bankruptcy Order made against him/her on 10 January 2004, he/she would need to apply for discharge on or after 10 January 2009.
However, if a first Bankruptcy Order was made on 20 June 1998, with automatic discharge granted on 20 June 2001 and that person goes into bankruptcy again on 1 April 2004, he/she would have been automatically discharged on 1 April 2005.
If, however, the second Bankruptcy Order is made on, say, 20 July 2004, whilst he/she would have been automatically discharged on 20 July 2005, he/she may well be subject to a Bankruptcy Restriction Order.
It should be noted that discharge from bankruptcy does not mean that the bankrupt person’s assets revert to them. Any asset in the possession of the bankrupt person may be realised, after discharge.
Disposal of Assets at Undervalue
A bankrupt person would be committing a Bankruptcy Offence if he/she disposed of assets at less than their current value. For instance, if a husband ‘gifted’ his share of the matrimonial home to his wife, and the transaction was discovered, then the transaction would be overturned, ie the property would once again be jointly owned by husband and wife and the husband’s interest in the property would vest in his Official Receiver/Trustee in Bankruptcy.
Such a transaction would not stand in bankruptcy if the property was gifted less than five years before the Bankruptcy Order was made, if the husband was insolvent at the time or became insolvent as a result of making the gift. Even if the husband was solvent at the time of the gifting and did not become insolvent as a result of making the gift, the transfer must have occurred at least two years before the date of the bankruptcy, for the transaction to stand.
Whilst the husband may, in the above circumstances, be automatically discharged from his bankruptcy on the first anniversary of the Bankruptcy Order being made, he would likely be subject to a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking.
If, of course, the wife purchased the husband’s share of their home for fair market value and the transaction was properly recorded (ie a current market valuation obtained from a bonafide source, etc), and the appropriate transfer documents were drawn up by a solicitor, then that would be quite acceptable, although the husband could be expected to be called upon to explain how he had expended any funds he received, as a result of the transfer.
Equity in Property
We often speak to people who have relatively low unsecured liabilities and considerable equity in their property.
Borrowing on credit cards is very expensive. Similarly unsecured loans are generally at a higher rate of interest and often available (especially to those with a poor or adverse credit rating) from the less scrupulous lending institutions.
Anyone with equity in a property and unsecured borrowing they are struggling to service, should consider a remortgage of the property, to release funds to pay off unsecured credit.
If monthly income is under pressure, it is common sense to borrow another £10,000 on a mortgage, to clear unsecured borrowing. An extra £10,000 on a mortgage will cost considerably less, per month, than a £10,000 balance on a credit card. Whilst the borrowing will not have been reduced, it will be more affordable. Obviously the credit card should not be used further, to avoid the individual having further unsecured borrowings, in addition to an increased mortgage payment.
A Bankruptcy Order against a debtor gives that person protection from his/her creditors (unless they have obtained a Liability Order). Once a person goes into bankruptcy, pressure from creditors and/or bailiffs acting on behalf of creditors, will cease. Whereas a creditor with a judgement against a debtor may send in bailiffs to seize goods, in bankruptcy, normal household goods and personal belongings will be classed as exempt property.
As a rule of thumb, if a debtor is able to convince the Official Receiver that he/she requires a vehicle, worth up to around £500, for his/her work, or whatever, then usually (but not always) that vehicle will be classed as exempt property.
Similarly, tools of the trade of the bankrupt person continuing in that trade, will be exempt.
Normal household goods (three piece suite, TV, video, etc) will be exempt. However, any single item worth £500 or more (ie grand piano, collection of silver/rare books/antique table, etc) will be classed as an asset of the bankruptcy and may be sold for the benefit of creditors.
Debts arising as a result of fraud or gambling will be included in a bankruptcy (from 1 April 2004 as a result of the Enterprise Act), but will render the bankrupt person subject to a Bankruptcy Restriction Order/Undertaking.
Income Tax Refunds
Any tax refund paid to the debtor during a bankruptcy automatically vests in the Official Receiver/Trustee in Bankruptcy. It is a bankruptcy offence not to notify the Official Receiver/Trustee in Bankruptcy of such a refund.
Anyone in PAYE employment is given an NT tax code, once the Bankruptcy Order has been made. If that person continues in the same employment, he/she will not pay any tax for the remainder of that tax year. The bankrupt person will not, however, benefit from that saving, but will be required to make same available to the Official Receiver/Trustee in Bankruptcy.
A self employed person does not qualify, as above, however. A self employed person is required to pay tax and NI contributions as normal, from the date of the Bankruptcy Order.
Any tax liabilities up to the date of the Bankruptcy Order will, of course, be included in the bankruptcy.
Income Payment Agreement/Income Payment Order
When a Bankruptcy Order is made, the bankrupt person will be required to provide, amongst other information, details of his/her income and expenditure.
An Income Payment Agreement is a statutory contract and may be varied by written agreement or by Order of the court. An Income Payment Agreement may be obtained by the Official Receiver, as receiver and manager of the bankruptcy estate.
If such an agreement has not or cannot be reached, the Trustee in Bankruptcy may apply to Court for an Income Payment Order. In such an instance, all the relevant information is placed before the District Judge, who then decides on the level of payment to be made. If the debtor does not comply with the Order, he/she will be in contempt of court. An Income Payment Order may only be varied by a Court Order, not by ‘informal’ discussions with the Trustee in Bankruptcy.
If an Income Payment Order is made and the debtor’s circumstances then change, the Order may be varied by an Application to court. In such circumstances, the debtor should, in the first instance, contact the Official Receiver/Trustee in Bankruptcy.
If an IPA is reached by way of agreement and the debtor’s circumstances change, he/she should immediately advise the Official Receiver/Trustee, so that a new agreement may be reached.
Income Payment Agreements/Orders will last for a period of three years, starting from the date of the Income Payment Agreement/Order being made (ie not from the date of the Bankruptcy Order).
From 1 December 2010, the Insolvency Service adopted a different policy when applying for an Income Payment Order or Agreement against the bankrupt person.
Prior to this date, the general 'rule of thumb' was that the Official Receiver would be looking to obtain a contribution of around 70% of disposable income per month, ie what remained after the debtor covered his/her essential living costs and those of dependents. This, in effect, allowed the debtor to retain 30% of any monthly disposable income to do with as he/she wished. Generally, in reality, they did not claim less than around £50 per month. To explain - if 70% of disposable income equated to, say, £35 per month, the bankrupt person was not called upon to make any contribution by way of an IPO/IPA.
That policy has been revised and the OR will now claim an IPO or IPA where the disposable income is £20 per month or more.
If the bankrupt's disposable income is, say, £10 per month, then he will not be expected to make that available in an IPO or IPA.
Further, if the bankrupt person has disposable income of £20 per month or more, he will also no longer retain any of the remaining surplus, once all their reasonable household expenditure has been accounted for.
To put it simply, if the bankrupt has disposable income of, say, £30 per month or £200 per month, the OR will seize those funds in entirety, under an IPO/IPA.
Whilst this may be seen, by some, as quite harsh and a retrograde step, in reality it is in line with what is expected of the debtor in an IVA and/or a Debt Management Plan. In addition, of course, an Income Payments Order or Agreement is only for a period of three years whereas an IVA will require a contribution of the debtor's entire disposable income for a period of five years. A Debt Management Plan, of course, will require repayments for an indefinite period, often 10 years or more, until the debt (plus the percentage fee taken by the Debt Management Company) is repaid in full.
As is normal, the Official Receiver will consider each case on its own merits (rather than, in many IVA's - particularly those set up by an 'IVA factory' - the Supervisor encouraging the debtor to agree to the demands of the creditors, regardless of the affordability). The OR's staff are instructed to reach any decision when applying for an IPO/IPA after considering whether the expenditure information provided by the bankrupt person is realistic, relevant and appropriate to the bankrupt's circumstances and whether the amounts included are sufficient to provide for the reasonable domestic needs of the bankrupt and his/her dependents.
Given the above, it is, therefore, even more important than it has been to date, to ensure that accurate expenditure details are provided. Provided they are, indeed, accurate and reasonable, I would hope that they would be accepted and not reduced. Of course, if a totally unrealistic figure is claimed (as in one case I dealt with recently where the debtor wanted to claim £1000 per month for food and housekeeping for himself and his partner), then the OR will dis-allow what he feels is the excess.
Further, the OR's will allow a small amount per person in the household to be retained for emergencies, repairs, gifts, etc.
In addition to the revised policy as detailed above being applied to any IPO/IPA after 1 December 2010, the OR is to review existing agreements and, under this legislation, has the ability to request an increased payment.
If this latter point applies to any BAS Limited clients, we are happy to discuss what may be expected on them under this new regime.
Income and Expenditure
There are no fixed guidelines in respect of how much a bankrupt person is allowed to keep, from his/her income, as everyone’s circumstances will differ, ie a single bankrupt person living in central London is likely to have higher living costs than a single bankrupt person living in another part of the UK; a family of six will have considerably higher outgoings than a couple with just one child, etc.
Those required to provide details of income and expenditure should take time and care in providing detailed and accurate information. Items of expenditure, for example, should include:
Mortgage/Rent Gas, Electricity, Water
Council tax Telephone
TV rental/licence Life/household insurance
Child maintenance Dry cleaning
School lunches/meals at work
Health care (dentist/optician/prescriptions)
Travel (public transport or car tax, insurance, petrol, repairs)
Some allowance – say £50 per month – may also be claimed for emergencies/hair cuts/gifts, etc.
The above is obviously only provided as a guide, but we regularly see people who have forgotten a major item of expenditure and then complain when an Income Payment Order is difficult to honour, as their expenditure is higher than that which they detailed to the Official Receiver/Trustee in Bankruptcy. Please take extra care, therefore, when providing details of outgoings to the Official Receiver/Trustee.
Individual Voluntary Arrangements
An Individual Voluntary Arrangement is a legally binding agreement, for the satisfaction of debts, either in full or in part, which is binding on all unsecured creditors. It is a method of avoiding bankruptcy, while still being subject to a formal insolvency procedure.
A proposal for an IVA can only be made with the service of a licensed Insolvency Practitioner.
It should be clear that, in our opinion, despite various guidance notes and best practice instructions from the regulatory bodies of Insolvency Practitioners as well as the recently agreed IVA Protocol, some people continue to be ‘encouraged’ to propose an IVA which may not be the best option for them, but rather generates the most fees for the Insolvency Practitioner.
Anyone considering an IVA should ensure that they receive best advice, explore all the options available to them and, in particular only make a proposal that they are 100% certain that they can afford. If creditors request a higher contribution, the debtor should give very serious consideration to his/her response. Despite ‘advice’ provided by some debt counsellors, Insolvency Practitioners, etc., in some instances, bankruptcy is the best method of freeing a debtor of unmanageable debt.
‘Fast Track’ Individual Voluntary Arrangements
Prior to 1 April 2004, anyone wishing to propose an Individual Voluntary Arrangement, whether to avoid bankruptcy or to lift him/herself out of bankruptcy, once the Bankruptcy Order had been made, needed assistance from a licensed Insolvency Practitioner.
One of the provisions of the Enterprise Act allows an Official Receiver to act as Nominee and Supervisor of an IVA.
It was suggested, at least initially, that the Official Receiver would only act in such a capacity when a Bankruptcy Order has been made against the debtor and he/she is able to make a contribution to creditors, from disposable income. He/she would need to prefer to propose an IVA – usually making payments for five years – as opposed to having the restrictions of bankruptcy for 12 months, being subject to an Income Payments Order or voluntary contribution for three years.
These ‘fast track IVAs’ have transpired to be appropriate in only a few cases, those which are very simple and straight forward, with disposable income in the bankruptcy estate, but no assets.
An FTVA would only receive the support of the Official Receiver if it produced a greater return to the creditors than the bankruptcy.
Such a proposal would need the approval of 75% of creditors by amount, but the creditors would need to accept the proposal as it was put to them by the Official Receiver, ie. there is no provision for any creditor(s) to modify the original proposal.
The costs of these fast track IVAs are minimal – Nominees fee of £300, Registration fee of £35 and Supervisor’s fee of 15% of all asset realisations.
Anyone who wishes to make such a proposal should do so as soon as possible after the Bankruptcy Order is made and most certainly during the term of bankruptcy. If the proposal is accepted, the debtor would have the bankruptcy annulled and would be required to commence the agreed payments.
If the debtor fails to maintain payments into the Arrangement, the Official Receiver will take steps to encourage the debtor to re-start contributions. If that is unsuccessful, the Official Receiver could issue bankruptcy proceedings, if he was of the opinion that it was within the public interest.
On 29 January 2008, a voluntary code of conduct was agreed with the organisations and bodies involved in managing and agreeing IVAs, following a series of discussions and negotiations facilitated by the Insolvency Service.
The voluntary code seeks to ensure the processes involved which lead to an IVA will be more transparent and includes standard terms and conditions, greater certainty on dealing with a debtor’s home and greater reassurance for creditors and debtors that the best option has been presented.
The protocol SHOULD mean that IVAs will provide debt relief for individuals in financial distress as all parties agree to openly disclose relevant facts and work to a standard framework which applies to both providers (IPs) and creditors.
Informal Arrangements with Creditors
Anyone coping with unmanageable debt should consider taking advantage of our negotiating service to enable us to advise their creditors of their difficulty and negotiate interest being frozen and lower payments, over a fixed period of time. Such an agreement could give the ‘breathing space’ many debtors need to restructure their finances (ie by remortgaging their property to release equity/return to work after illness, obtaining employment after redundancy, reassess their situation after a relationship breakdown, or whatever).
Creditors are, by and large, understanding when debtors experience problems, if they are kept informed of the situation. It is when matters are allowed to get out of hand (telephone permanently on answerphone, consistent missed payments, no response to requests to call, etc), that harsher recovery action is taken.
The best advice to anyone with financial problems is to seek advice, sooner rather than later, and to keep creditors informed.
Creditors may agree to a request to freeze interst and accept nominal payments, until the debtor’s circumstances improve. Alternatively, they may agree to accept a percentage of the overall debt in full and final settlement, if they can be convinced that that is the debtor’s best and only offer.
Inheritance during Bankruptcy
If a bankrupt person inherits during bankruptcy, that inheritance will be seized for the benefit of creditors. It is therefore vital that anyone who feels there is a chance of this happening, should take the appropriate steps to have that Will changed.
In a similar vein, any lottery winnings, for example, would be seized by the Official Receiver/Trustee in Bankruptcy.
If, of course, the inheritance/win was in excess of the debts and costs of the bankruptcy, then the balance would be returned to the debtor who could then apply to have his/her bankruptcy annulled.
Any inheritance/windfall after discharge does not vest in the Official Receiver/Trustee in Bankruptcy and may be kept by the discharged bankrupt person.
If two people have joint liabilities and one goes into bankruptcy, those joint liabilities then become the sole responsibility of the non-bankrupt debtor.
Leases and Contracts
A lease agreement will be deemed to be null and void upon the making of a Bankruptcy Order, ie if a person has a lease on a shop and ceases to trade before the lease expires, a Bankruptcy Order will free him/her of any future liabilities on the lease.
We have excellent connections with specialist insolvency lawyers, around the country. If you require further information in this regard, please telephone us.
Legal Proceedings in progress at date of Bankruptcy
Any civil action in progress against the debtor at the date of bankruptcy, other than matrimonial proceedings, die at the date of the Bankruptcy Order. In a similar vein, if the debtor is taking legal action against any other person, it is highly unlikely that the Official Receiver/Trustee in Bankruptcy will agree to the bankrupt person pursuing that action. This excludes any action for personal injury (perhaps as a result of a road traffic accidence, for example). The Official Receiver/Trustee in Bankruptcy would, however, have an interest in some of any award made, in a personal injury case.
Only selective creditors may obtain a Liability Order against a debtor. They include Local Authorities, Landlords in respect of rent arrears, H M Revenue & Customs, etc. Liability Orders stand, irrespective of any Bankruptcy Order made against the debtor, ie a bankrupt person would need to pay a creditor who had obtained a Liability Order against them, prior to the bankruptcy. Any payment made to such a creditors – under the Liability Order – would, of course, be taken into account when disposable income was calculated with a view to the Official Receiver obtaining an Income Payment Order/Agreement.
Living and working abroad during Bankruptcy
There is nothing to prevent a bankrupt person either living or working abroad. Bankruptcy is jurisdictional, that is, a person bankrupt in England would not suffer the same restrictions as a result of his/her bankruptcy, if he/she went to live in the USA or Far East, for example.
Passports are not confiscated, other than in very exceptional circumstances, where the authorities are of the opinion that the bankrupt person may try to disappear abroad with assets or funds.
If a person living abroad (outside of the EU) has debts in the UK and wishes to submit to bankruptcy, he/she will be required to return to the UK to submit his/her petition. Such a petition will need to be heard in the High Court, Strand, London. Alternatively that individual could provide a third party with Power of Attorney to submit their petition on their behalf – this is a service which we provide, for more information visit our website or telephone us.
Bankruptcy proceedings may, however, be issued against a debtor living abroad, in his/her absence. The bankrupt person is unlikely to receive an automatic discharge unless he/she fully complies with the requirements of the Official Receiver/Trustee in Bankruptcy and this normally means at least making contact and providing information to the Official Receiver/Trustee in Bankruptcy.
Matrimonial/Family Home in Bankruptcy
The bankrupt person’s interest in their home automatically vests in the Official Receiver, immediately the Bankruptcy Order is made.
A bankrupt person, with dependents living with him/her, may expect to be given 12 months from the date of the Bankruptcy Order, before the Official Receiver/Trustee in Bankruptcy will take any action against the property.
Prior to 1 April 2004, an Official Receiver/Trustee in Bankruptcy could simply maintain his interest in a property until he chose to address the matter. However, one of the provisions of the Enterprise Act requires the Official Receiver/Trustee in Bankruptcy to deal with the main residence of the bankrupt or the property occupied by his/her spouse as a main residence, within three years of the Bankruptcy Order.
If the Official Receiver/Trustee in Bankruptcy does not deal with the property, by any of the following options, then the property will re-vest in the bankrupt:
1. Seeking an Order for possession
2. Seeking an Order for sale
3. Reaching an Agreement to release his interest in the property
4. Placing a Charge on the property, protecting the equity available in the property at the date of the Charge being placed
The bankrupt person would be advised if the property re-vests in him/her, by the Official Receiver.
Revision to the treatment of the family home in bankruptcy.
From 1 January 2011, how the Insolvency Service deal with the bankrupts' family home will be revised.
The Official Receiver, as Trustee of the bankruptcy estate, will no longer seek to dispose of a bankrupt's interest in a jointly owned family home, as defined by Section 283A of the Insolvency Act 1986, under the Property Conveyancing Scheme, prior to two years and three months from the making of the Bankruptcy Order, unless an offer is received which is clearly in the interest of creditors to accept. In practice, this is likely to be for an amount which exceeds £1,000. In simple terms, there will be no more agreements by the Official Receiver to a sale of a property in negative equity for a nominal sum (until this amendment, the 'nominal sum' was usually £1 plus legal fees). In practice, unless the bankrupt or non bankrupt spouse is prepared to pay at least £1,000 to purchase the OR's interest in a property in negative equity, the OR will simply maintain his interest and address same after 2years and three months, ie within the three year 'use it or lose it clause' in the Enterprise Act.
The above cases will be transferred, from the local OR's office to the five Regional Trustee Liquidator Units (RTLU's) around the country.
In those cases where there is substantial equity, a decision will be made whether that particular case merits the appointment of an Insolvency Practitioner as Trustee in Bankruptcy or whether the OR, if there is a person willing to purchase his interest for an agreed figure which reflects the equity in the property, handles the realisation of the asset in-house.
The property cases passed to the various RTLU's will be reviewed at 2 years and 3 months after the Bankruptcy Order was made. In those cases where the bankrupt's interest in the property is still valued at less than £1,000, steps will be taken to re-vest the property interest in the bankrupt.
If, at this review stage, there is insufficient equity to attract an insolvency practitioner to act as Trustee of the bankruptcy estate, the OR will approach the (in most cases, now discharged) bankrupt or non bankrupt spouse/joint owner to ascertain whether they would be interested in purchasing his interest, if, of course, as could be expected, the bankrupt's interest vesting in the OR is valued at more than £1,000. If it is impossible to transfer the interest - having established it is more than £1,000 - then the OR would consider applying for a Charging Order on the property, to protect his interest in same. Depending on the level of equity, he could also seek the appointment of a Trustee in Bankruptcy.
There are also new guidelines in respect of the early re-vesting of the property back to the bankrupt. Early re-vesting will only be considered where, for instance, at the date of the bankruptcy, the property is in substantial negative equity, possibly having second or further charges such that the OR may determine that there is no reasonable prospect of the property going into 'positive' equity, within the three year period.
Early re-vesting would also be considered where the bankrupt person, prior to the 2 year 3 month review, advises the OR that he, or one of his dependents, has a disability or is a carer or requires to be cared for, in the property. Similarly, where anyone aged 65 years or over resides in the property and in cases where the loss of the property could lead to mention health problems.
The above is equally applicable to those properties which are in the sole ownership of the bankrupt, as well as those which are jointly owned.
The level of equity will, of course, need to be established by obtaining a valuation of the property, from a suitably qualified person, ie a Chartered Surveyor.
We regularly handle negotiations to secure property at the least possible cost and anyone needing further advice or assistance in this regard should contact us.
We are able to recommend mortgage brokers who have vast experience in dealing with people with an adverse credit history.
They are able to arrange mortgages for the non-bankrupt spouse of a bankrupt, for a person recently discharged from bankruptcy and for those people wishing to release equity in their home, to make payment to unsecured creditors to enable them to avoid bankruptcy.
The Official Receiver is an employee of the Insolvency Service, an executive agency of BERR (Business, Enterprise & Regulatory Reform).
There are around 35 Official Receiver’s offices in England, Wales and Northern Ireland.
If an individual has a complaint about an Official Receiver, he/she may contact Insolvency Service Headquarters, 21 Bloomsbury Street, London SWC1B 3QW. It is recommended that the complainant provides details of the bankruptcy – date, number and court where the Order was made, as well as a clear description of his/her concern.
Pension Rights in Bankruptcy
Anyone having had a bankruptcy petition issued or a Bankruptcy Order made, prior to 23 May 2000, will find that their pension vests in the Official Receiver/Trustee in Bankruptcy.
In such cases, the Official Receiver/Trustee in Bankruptcy may well consider some proposal from the discharge bankrupt or third party to purchase his interest in the pension. Any agreement will depend upon when the pension matures, ie how soon the funds will be available, for the benefit of creditors.
This is, again, a negotiation that we are happy to undertake.
Those people who had Bankruptcy Orders made against them after 20 May 2000 do not, in the main, lose their pension.
Procedure following the making of a Bankruptcy Order
Shortly after a Bankruptcy Order is made, the Official Receiver will make contact with the bankrupt person, to establish the facts of the case and undertake any investigations necessary.
If there are no assets in the bankruptcy estate or, indeed, only limited assets, the Official Receiver or RTLU (Regional Trustee Liquidator Unit) will continue to handle the administration of the bankruptcy.
If, however, there are more extensive assets available for creditors, then an Insolvency Practitioner will likely be appointed to act as Trustee. His prime duty is to realise assets for the benefit of creditors. His fee will be taken first, from the realisation of assets, prior to any distribution being made to creditors.
Pursuit by creditors included in a Bankruptcy
Not unnaturally, some creditors are very aggrieved when a debtor goes into bankruptcy.
We do hear of occasions where a creditor will not accept that his debt is included in a bankruptcy and will attempt to pursue the debtor, either during the bankruptcy period or after discharge. This is illegal and such instances should be reported to the Official Receiver/Trustee in Bankruptcy.
If any threats of violence are issued, the Police should be advised immediately.
Redundancy Payments and Payments in Lieu of Notice
Redundancy payments, like tax refunds or other windfalls such as inheritance, will vest in the Official Receiver, if they become payable during the period of bankruptcy.
Similarly, any payment made in lieu of notice, during the bankruptcy period, will be classed as ‘after acquired property’ and may be seized for the benefit of creditors.
Release of the Official Receiver/Trustee in Bankruptcy
If there are no assets in the bankruptcy estate and the Official Receiver/Trustee in Bankruptcy is satisfied that there will be a nil return to creditors and/or all distribtions have been made, he may apply for his Release. This in no way affects the length of the bankruptcy and is simply an action that is taken to limit the administrative costs of the bankruptcy and, in effect, closes the file.
Restrictions of Bankruptcy
The restrictions a bankrupt person has placed upon him were reduced from 1 April 2004.
Whilst a bankrupt person may not be a company director, he/she may be an MP or a JP, providing he/she is not subject to a Bankruptcy Restriction Order.
A bankrupt person may not obtain credit in excess of £500, without making the lender aware of his/her bankrupt status. We would, however, advise that agreement is obtained in writing, from anyone providing credit of above that limit, to avoid any disputes arising in the future, about the borrowing.
Self employment in Bankruptcy
There is nothing to prevent a person continuing to trade, after being made bankrupt. He/she must, however, continue to trade in the name in which the Bankruptcy Order was made and also work within the restrictions of bankruptcy.
Most bankrupt people who continue to trade after having a Bankruptcy Order made against them, find their biggest difficulty is in obtaining banking facilities. Currently most bankrupt people are able to open a basic deposit account.
Permission to continue self employment/trading is at the discretion of the Official Receiver.
In the spring of 2007, the Insolvency Service began a consultation process looking at proposals to simplify IVAs (SIVAs).
Proposals to simplify the current process for those debtors with undisputed debts of less than £75,000 include the approval of the proposal by a simple majority vote, no opportunity for the creditors to modify the proposal and creditors being required to file their claims within 90 days. These proposals are designed to reduce the administrative costs which should, ultimately, reduce the IP’s fees paid by the debtor.
The Insolvency Service are currently awaiting Parliamentary approval for these proposals and are hopeful that SIVAs will come into being in either October 2008 or April 2009.
Savings and Debt
Amazingly, we often hear from people who are struggling to cope with debt but who have savings in some form or other.
The bank rate being as low as it has for the last few years, savings attract very little interest. Unfortunately, many lenders (particular providers of credit and store cards) have not reflected the low interest rates in their charges.
It follows, therefore, that the best way of saving is to pay off debt first and foremost.
A Statutory Demand is a forerunner to bankruptcy and should not be ignored. It gives the debtor 18 days to either settle the debt or, if there are good reasons, to apply to have the Demand set aside.
Student loan liabilities will not be included in a bankruptcy. Arrangements must be made to repay such liabilities outside of the Bankruptcy. Debtors should ensure to include this as an item of monthly expenditure if they enter into bankruptcy.
Suspension of Automatic Discharge or Objection to Early Discharge
If the bankrupt person does not comply with the requirements of the Official Receiver or Trustee in Bankruptcy, his/her automatic discharge may be suspended. This will involve either the Official Receiver or Trustee making an Application to court to suspend. He will be required to provide information to support his Application.
Trustee in Bankruptcy
If there are assets in the bankruptcy estate, it may be expected that an Insolvency Practitioner will be appointed as Trustee of the bankruptcy estate. They will take their fees from the realisation of the bankrupt person’s assets, before any distribution is made to creditors.
A Trustee is a licensed Insolvency Practitioner and is often more difficult to deal with, than the Official Receiver, due to the fact that they will be responsible for generating their own fees.
Insolvency Practitioners are licensed by various bodies such as The Institute of Chartered Accountants, The Insolvency Practitioners Association, the Department of Trade & Industry and the Law Society.
Anyone wishing to complain about the actions of an Insolvency Practitioner will first need to identity which is his/her authorising body. We can, of course, provide that information.
The suppliers of gas, electricity, water and telephones are advised automatically when a Bankruptcy Order is made, whether or not they are a creditor in the bankruptcy.
They will usually then contact the consumer and request that another person accepts responsibility for the account or that a prepayment meter is installed.
These days it is rare for supplies to be withdrawn, although not unknown.