A Basic Guide to Bankruptcy

Bankruptcy is the term to describe individual insolvency. A person is insolvent when they do not have sufficient assets to discharge their debts as they fall due.

Although bankruptcy is inherently a desperate situation there are a number of options available depending on the circumstances. Professional help should be sought at an early stage to achieve the best outcome.

Introduction to Bankruptcy

An individual may make a bankruptcy application to the court on the grounds that he is unable to pay his debts. Alternatively, creditors that are owed £5,000 or more may make a petition for a bankruptcy order. If the court is satisfied, it may issue a bankruptcy order. Alternatively, it may:

$    1.      Delay the hearing until a further date; if further information is required for example.

$    2.      Dismiss the petition; usually where an administration order would be preferable.

$    3.      Appoint an insolvency practitioner, where an Individual Voluntary Arrangement (IVA) might produce a better outcome.

When an individual is declared bankrupt his financial affairs become the responsibility of the trustee in bankruptcy who may be the Official Receiver or an insolvency practitioner.

Bankruptcy Order

As soon as the court makes a bankruptcy order, the individual is deemed bankrupt. The bankrupt is placed on the individual insolvency register, to alert creditors and others. The bankrupt’s assets vest in the trustee in bankruptcy who can sell them to pay creditors. This includes the home which may be sold, subject to a 12-month right of occupation for any non-bankrupt co-owners, family or dependents.

One the trustee in bankruptcy has taken over the bankrupt’s affairs; the bankrupt cannot use bank accounts or make payments to creditors. Other restrictions also apply such as limited access to credit and being unable to act as a company director. Bankruptcy usually lasts up to 12 months.

Individual Voluntary Arrangement

This is effectively a contract agreed between an individual and his creditors to pay some or all of the debts in a structured manner. The proposal must be initially approved by a licensed insolvency practitioner and then approved by more than 75% of the creditors by value, which are then bound by its terms.

It is a voluntary matter so the individual must consent to the IVA. As actual bankruptcy is avoided, it avoids some of the stigma of bankruptcy.

Administration Order and Debt Relief Orders

Further alternatives exist such as an administration order or debt relief order. Administration orders may be made if an individual has unsecured debts of less than £5,000 and at least two creditors. The advantages are that the individual is ordered to make a single payment to the court each month which the court administers to creditors and creditors cannot pursue further claims.

If you are struggling to pay debts or are facing potential bankruptcy, it is essential to seek the advice of an experienced solicitor early on, contact c.dunbar@osmondandosmond.co.uk or d.cockle@osmondandosmond.co.uk or by telephone on 0207 583 3434.

In most cases, we can arrange a free initial consultation.