Bankruptcy is typically viewed as a last resort for managing debt. When UK residents determine that they cannot repay their debts, they apply for bankruptcy so their assets can be used to repay their creditors.
During the bankruptcy period, an individual is subject to certain restrictions and afterward, the included debts are discharged, allowing the individual to start anew.
Bankruptcy is an extreme solution, so prior consultation with a debt management professional is recommended.
Anyone, including sole traders and partners, can apply to a bankruptcy court to be made bankrupt. If a creditor is owed at least £750, it can petition the court to bankrupt the debtor. In England and Wales, an individual completes a Debtor’s Bankruptcy Petition and Statement of Affairs, Debtor’s Petition.
The reasons for bankruptcy are listed on the Bankruptcy Petition and all assets and debts, plus creditor details, are included on the Statement of Affairs. Bankruptcy procedures and documents differ in Northern Ireland and Scotland.
A £525 fee to cover bankruptcy management and £175 fee for court costs must be paid before the nearest bankruptcy court will consider the petition.
Once the fee is paid, the court will issue a bankruptcy order, delay the case pending receipt of additional information, reject the petition, or reject it and order an alternative debt management solution.
If the petition is rejected, bankruptcy fees are not refunded but the court may apply them to an alternative debt management solution.
If the bankruptcy is approved, an official is appointed to manage the process. This person is called a Trustee and may be either an authorized Insolvency Practitioner or an Official Receiver, who is a bankruptcy court officer. An Official Receiver serves in this capacity until a Trustee is officially named.
The debtor must turn over financial interest in the home, any assets of value, and credit and bank cards to this individual. Any remaining income may be used to help repay the debts.
The Business Factor?
If the debtor runs a business, the entity usually must be closed and employees must be dismissed. A bankrupt individual may not work as a company director, charity trustee, solicitor, or in a Financial Services Authority-regulated position. During bankruptcy, bank accounts are frozen and opening new accounts may not be permitted.
A bankrupt individual must inform a lender of the bankruptcy before attempting to borrow more than £500.
While payments to most creditors cease during bankruptcy, debts like student loans and court fines are not usually covered, so the debtor must continue to pay these.
A bankruptcy becomes a part of official public records. The Official Receiver records the bankruptcy in the London Gazette and on the Individual Insolvency Register.
A typical UK bankruptcy lasts 12 months but may conclude earlier or be delayed. However, income earned for up to three years can be used to help repay covered debts.
Credit references agencies maintain bankruptcy records for six years, restricting the ability to obtain credit.
Restrictions imposed during a bankruptcy may continue for up to 15 years, based on the cause of the situation.
Infographic source: CCCS Bankruptcy advice for England & Wales