The Government has put in place numerous measures to support businesses affected negatively by COVID-19. There are grants and loans to help businesses with a focus on paying the wages of their staff - to keep them employed and the business running. There is also support for individuals to delay mortgage payments and loan and credit card repayments. Click here to go to the Government website for more information.
You might be worrying about going bankrupt? It’s vital that you access all the Government support that is available and that you take specialist advice before making any decisions. Here our insolvency expert David Perry, explains the key facts around bankruptcy.
What does it mean if I go bankrupt?
Bankruptcy can occur for one of two reasons:
- because your assets are worth less than your debts – which is called balance sheet insolvency, or
- because you’re unable to pay your debts when they are due – which is called cash flow insolvency.
What happens to my home if I am bankrupt?
During the first year after bankruptcy, the court is unlikely to make an order for sale of your home. However, after this, the interests of your creditors is the priority. In this situation, the court can only refuse orders for possession and sale in very special circumstances. These are generally when the health of an individual will be seriously threatened if possession is given.
Before your home can be sold, if you do not voluntarily give up possession of it, an order for possession (and if the house is jointly owned, for sale) needs to be made by the court. If your co-owner opposes such an order being made, and is unsuccessful in their attempt, they are likely to be ordered to pay the costs of the court proceedings.
How can I avoid bankruptcy?
There may be possible alternatives to bankruptcy, such as seeking to reschedule your debts with your creditors or entering into a formal Individual Voluntary Arrangement (IVA).
An IVA is an agreement in which you agree to pay the debt (or part of the debt) to your creditors. Such an arrangement needs to be approved by creditors owning 75% of your debts by value (who chose to vote on it) and unconnected creditors (so excluding, for instance sums owed to family members) owed at least 50% of the unconnected debt.
If either if these thresholds is not reached then the arrangement is not approved. The payments themselves are made to an insolvency practitioner who then in turn will distribute money between creditors. The advantage of an IVA is that, in comparison to going bankrupt, you may maintain a bit more control of whatever assets you do still have. This could be very useful and reduce the amount of stress you experience. Also, they can be more flexible. For example, it is possible for an IVA to simply involve a payment being made into the IVA by your spouse, from his or her own resources, settling a percentage of the total debt, or in settlement of the whole debt.
Generally, an IVA is likely to be the best way forward if you are balance sheet solvent but cash flow insolvent. This is because it will buy the time you need to realise your assets and get the monies you need together. In such circumstances, the creditors will generally require to be paid in full over a period of time, but may well agree to waive interest.
If you are balance sheet insolvent, more consideration needs to be given as to whether an IVA is the best way forward. This is because an IVA will, in these circumstances generally only be accepted by your creditors if it gives a better return than bankruptcy. This is likely to mean that you will need to pay monies into the IVA for a significantly longer period than you would have to make payment from your income, if you were to be declared bankrupt. It may accordingly be better to accept bankruptcy so you can start to move on and rebuild your life more quickly.
Declaring yourself bankrupt
It is open to an individual to declare themselves bankrupt. This is done by completing an online form which can be accessed here. The government charge a fee for this and currently (March 2020) this is £680. The Insolvency Service will check that you are eligible to declare yourself bankrupt (in particular that your main centre of economic interest is in England and Wales). If you are eligible, they will email you back, usually within the week, to confirm that the bankruptcy order has been made.
Creditors can petition for your bankruptcy
Alternatively, one of your creditors can petition for your bankruptcy. This is done through the courts but before they can start they need to have one of two things:
- a judgment against you which they have unsuccessfully tried to enforce by way of appointment of a county Court Bailiff or High Court Enforcement Officer or
- they must have served upon you a statutory demand which gives you 21 days in which to pay.
Disputing a Statutory Demand
If you wrongly receive a statutory demand in respect of a debt which you dispute, you can apply to the court to set it aside. This will prevent a winding-up petition being presented, until the court has determined whether the demand was appropriate. It’s possible to still raise dispute on the bankruptcy petition itself, but you will not be allowed to re-run arguments you raised unsuccessfully on the application to set aside the statutory demand.
I’ve been declared bankrupt – what happens now?
The first thing that happens is you will be sent a form by the Insolvency Service. At the same time they will arrange an appointment for you to come in and see one of their examiners to go through the completed form. Both the form and the interview will cover questions about how you came to be bankrupt and what assets and cash you own.
Who is a Trustee in Bankruptcy?
It is the job of the Trustee in Bankruptcy to realise your assets for the benefit of your creditors. They try and get funds from your assets to pay off your creditors, either in total or in part. Your Trustee in Bankruptcy will, in the first instance, be the Official Receiver who is a government officer at your local insolvency office. However, where your bankruptcy is more complicated, or you own property, this role is likely to be transferred to a private insolvency practitioner.
Transfer of your assets
Ownership of most of your assets automatically transfers to your Trustee in Bankruptcy but there are some exceptions. The most important of these are:
- any undrawn personal pension plans
- ordinary home contents of normal value
- any tools of the trade
- possibly a cheap car necessary to get you to and from work.
All other assets will be collected in by the Trustee in Bankruptcy and sold. It’s unlikely your home will be sold in the first year, but after that the court will move to put the legal processes in place to do so.
What does it mean to be discharged after a year?
Any property you acquire during your bankruptcy, will be considered as part of your bankruptcy and therefore will be available for distribution by your Trustee in Bankruptcy. After a year, however, you will usually be discharged. This does not mean that any items that you owned before you were made bankrupt are returned to you. It means that you can again acquire property and the restrictions that you had whilst a bankrupt are removed.
Restrictions while bankrupt
There are several restrictions but most important of these restrictions are:
- you cannot be (or act as) a company director
- you cannot obtain credit for more than £500 without telling the lender about your bankruptcy. It is a criminal offence to do so.
If you have failed to co-operate with your Trustee whilst bankrupt, the Trustee in Bankruptcy can apply to extend your bankruptcy - either for a set period of time or permanently, until you
co-operate. Also, the Trustee in Bankruptcy can apply for a bankruptcy restriction order to be made if your conduct leading up to the Bankruptcy was particularly poor. This replicates many of the restrictions placed upon you whilst bankrupt, for a period of time after discharge which prolongs the period in which you are restricted.
How is my income affected if I am bankrupt?
In respect of your income, the Trustee in Bankruptcy may look for you to pay part of your earnings into the Bankruptcy for a period of up to 3 years. This can only happen in two circumstances:
- where you have agreed to do so or
- the Trustee in Bankruptcy has applied to court for an order requiring you to do so, prior to your bankruptcy being discharged.
If you have any concerns that you might be about to go bankrupt, it’s vital that you seek specialist legal advice quickly and before you make any decisions about what to do.