Bankruptcy questions and answers
- What is bankruptcy?
- So bankruptcy still has very serious implications?
- What assets would I stand to lose?
- So I could lose my home?
- How long does this period of being a bankrupt last?
- Do other people have to know that I’m a bankrupt?
1. What is bankruptcy?
Bankruptcy is a legal procedure where you are deemed unable to pay your debts as they fall due. The procedure can be instigated by your creditors, but is often instigated by the bankrupt themselves. It means that, for a period usually lasting 12 months, you cannot be a director or involved in the financial management of a company without the leave of the court and you cannot incur more than £500 of credit without informing the lender that you are a bankrupt.
There are also a number of jobs which are barred to a bankrupt. Whatever your job, it’s important to look at your contract of employment because increasingly these include a clause giving your employer the option of making you redundant should you be declared a bankrupt.
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2. So bankruptcy still has very serious implications?
It can have serious implications for a lot of people and it’s important to think carefully before going into bankruptcy. It isn’t necessarily as easy as the media would have you believe.
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3. What assets would I stand to lose?
When you become bankrupt, a Trustee in Bankruptcy is appointed to determine which of your assets are eligible to be sold in order to repay some of what you owe to creditors. Trustees in Bankruptcy are either a civil servant (an Official Receiver) or a Licensed Insolvency Practitioner. They will group your assets into various categories.
Assets you are allowed to keep include most household contents (with the exception of valuable antiques), a modest vehicle and your tools of trade. You can also keep your pension fund, so long as it’s a fund approved by HM Revenue & Customs, although your Trustee may seek to recover for the benefit of your creditors any excessive contributions.
Assets that can be sold include your personal property and any investments you have, like endowment policies. Should you receive a windfall, such as a legacy, this money will also go to you creditors. The Trustee is also able to apply to court for something called an income payment order if you are seen to have surplus income available.
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4. So I could lose my home?
Your home is especially at risk because it is typically where the most value lies. There are a number of scenarios, depending on the amount of equity the bankrupt has in their home.
For those who have some equity in their home and are the sole owner, the Trustee will generally immediately seek to take possession and evict the bankrupt. For those with no equity or 'negative equity' in their home, the Trustee in Bankruptcy will not usually seek to have the house sold. (Negative equity is when the first mortgage and any subsequent charges on the property exceed the value of the home.) This doesn’t mean that the mortgage company or the second charge lender won’t seek to force the sale of the property.
If your spouse or children are living with you at the property, you may be able to seek to defer any sale by the Trustee until the end of the first year after your bankruptcy. After that time, the interests of your creditors will usually come first and the court will only refuse an order for sale in exceptional circumstances or if the value of your interest in the property is worth less than £1,000. Before seeking an order for sale, the Trustee would, however, usually offer the bankrupt’s spouse the option to buy out the bankrupt’s interest in the property. But if they are unable or unwilling to make this payment the Trustee could obtain an order forcing the sale, regardless of whether there are children or other dependent relatives living there.
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5. How long does this period of being a bankrupt last?
The bankruptcy period usually lasts just 12 months. However, if you incurred your debts irresponsibly (through gambling, for example), or if you incurred your debts when there was no realistic prospect of repaying them, then the Official Receiver could obtain a bankruptcy restrictions order against you. This means the bankruptcy conditions could apply for a further two to 15 years. About 1,000 people a year currently have these additional restrictions placed upon them.
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6. Do other people have to know that I’m a bankrupt?
The first thing that happens in any bankruptcy is that it is advertised in a publication called the London Gazette. It is also published in your local newspaper, specifying your name, your occupation and your address.
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