Impact of declaring bankruptcy
Mar 09 2007
Deciding to become bankrupt has serious consequences and there are some alternatives which should be considered. Bankruptcy is a way of dealing with debts you cannot pay.
Bankruptcy (a) frees you from overwhelming debts so you can make a fresh start, subject to some restrictions (b) makes sure that your assets are shared out fairly among your creditors. Under the bankruptcy laws either you or your creditors (who must be owed more than £750) can petition the Court for a bankruptcy order. Once a bankruptcy order has been made either the Official Receiver or an insolvency practitioner will be appointed as your trustee in bankruptcy to administer your bankruptcy and to protect you assets from the date of the order.
Once the bankruptcy order has been made you must comply with the trustee in bankruptcy’s request to provide information. You will be required to attend an interview, having previously completed a questionnaire regarding your financial circumstances and your assets and liabilities. During the period of your bankruptcy you are severely restricted in the actions you can take so for example you will not be able to obtain credit of more than £500 without disclosing you are bankrupt.
Your trustee in bankruptcy will manage any payments to your creditors after realising any assets you have. What assets are you allowed to keep? You are basically allowed to keep
(a) tools, books, vehicles and other items of equipment which you need to use personally in your employment, business or vocation;
(b) clothing, bedding, furniture, household equipment and other basic items you and your family need in the home.
If you own your home solely or jointly, mortgaged or otherwise, your interest in the home will form part of your estate which will be dealt with by your trustee. The home may have to be sold to go towards paying your debts.
Regarding the leasehold business premises, once the bankruptcy order has been made the trustee in bankruptcy will assess whether the remaining four years of the lease represents an asset which could offer some value to your estate. If the premises is not considered to have any value, the trustee in bankruptcy can disclaim all interest in which case ownership will revert to the freeholder.
If you are self-employed, your business is normally closed down and any employees will be dismissed. Any business assets will be claimed by the trustee. You will have to give the trustee all you accounting records to help them assess the financial assets and liabilities. You will still be responsible for completing all tax and VAT returns.
The main alternatives to bankruptcy are Administration orders or Individual Voluntary Arrangements (IVA). Both have advantages and disadvantages when compared with bankruptcy. An IVA (whereby you reach an agreement to pay back a percentage of your debts) might be preferable if you own your own house as it might allow you to keep it. You will need to take advice from an insolvency practitioner or your Citizens Advice centre.
The following are useful for further information and advice:
- Visit the Citizens Advice website.
- The Insolvency Service has some useful publications and an advise line.
-The Association of Business Recovery Professionals or R3 will help find an insolvency practitioner.