Personal Bankruptcy occurs when either someone who is owed money (a creditor) or the person owing the money (the debtor) petitions the Court asking for the debtor to be made bankrupt. If the Court agrees a Bankruptcy Order is given on a particular date and time. The date and time are important as that is the moment when everything owned by the debtor vests (or is “owned”) by the Trustee in bankruptcy. Also at that moment anyone who is owed any money by the debtor is caught by the bankruptcy. So the date and time determines the assets and liabilities of the bankruptcy. Any liabilities entered into by the debtor after the time of the bankruptcy remain payable by the debtor. Unless the Court concludes a bankrupt has behaved in a criminal manner or has not acted in accordance with the Trustee’s permission the debtor is released from being a bankrupt.
Personal Bankruptcy Pros
- All liabilities and debts owed by the bankrupt are written off with the exception of a few debts such as gambling debts etc.
- Any debt management plan or Individual Voluntary Arrangement (IVA) is terminated and superseded by the bankruptcy so the debtor is released from any agreement the debtor has entered into with their creditors.
- After one year the debtor obtains an automatic discharge, unless the Court is again petitioned, and so the debtor can do all the things he could before can become a director of a company.
- Almost all pension schemes are safe from the bankruptcy and cannot be claimed by the Trustee.
Personal Bankruptcy Cons
The bankrupt:
- Cannot be a director of a company, policeman, fireman, MP or Judge.
- Can be sanctioned by a professional body eg Law Society or ICAEW and prevented from practicing whilst bankrupt and in some cases can even lose their professional qualification.
- Cannot be in control of your own assets – for example the Trustee has the power of sale of property including the matrimonial home held in joint names.
- Is charged expenses which come out of the estate. Bankruptcies are expensive – there are immediate charges of £6,000 plus a % charge on all assets realised and paid to creditors.
- The ownership of all assets vest in the Trustee, for example half the marital home.
- The trustee often does not realise as much for the assets eg house as the debtor would themselves as it is carried out on a forced sale basis. Purchasers are aware of that and adjust the pricing accordingly.
- The Trustee will investigate the affairs of the debtor and will take action if the debtor did not behave honourably. Here the Rules change and if the debtor has paid some creditors in priority to others and it can be shown it was done deliberately (fraudulent preference) the debtor can be held guilty of a criminal offence.
- May have transactions reversed. If the debtor entered into a transaction between the date of the petition for the bankruptcy and the date of the bankruptcy hearing this transaction is automatically void unless the Court specifically sanctions it. For example, if a bankrupt sold his house in the period between the petition being issued and the bankruptcy hearing even though the purchaser paid full value for the house the transaction is void. ie the Trustee owns the house and the purchaser would become a creditor in the bankruptcy!!!!! The same would happen if the debtor reached a divorce settlement in this time.
- Cannot borrow more than £250 – remember those electricity & gas bills!
- Has to trade in their own name.
- Has to inform the Trustee of change of circumstances eg salary/ wage rise as the Trustee may want the debtor to pay some of the funds into the bankruptcy.
- Any “windfall” ie receipt of funds whilst bankrupt automatically goes to the Trustee. For example any inheritance received or lottery winnings.
As can be seen there are not many personal bankruptcy pros in UK but the most important is that automatic discharge is within 12 months. There are alternatives to personal bankruptcy such as Individual Voluntary Arrangement (IVA) which does not share many of the cons as described above.
For a full discussion to assess your situation please do not hesitate to contact Lynn Gibson on 01932 336149 or accs@gibsonhewitt.co.uk for a FREE CONSULATION WITH NO OBLIGATION.
