Bankruptcy is a legal status consisting in the administration of the affairs of an insolvent individual by a trustee in the interests of his creditors generally. It does not apply to companies or partnerships, although individual members of a partnership can be made bankrupt.
An individual is made bankrupt as a result of a petition presented to the court by one or more creditors, the debtor or the supervisor of an Individual Voluntary Arrangement.
The purpose of the bankruptcy order is to appoint a responsible person who has a duty to collect the bankrupt’s assets and distribute them to his creditors in accordance with the law.
An application for a bankruptcy order may be made by any creditor with an unsecured debt of over £5,000. This may be the sum of two or more debts which total over £5,000 and there may be different petitioning creditors on the same petition in respect of different debts.
Immediately on the making of the order, the court will usually appoint the Official Receiver (OR) to administer a bankrupt’s estate. Where there are significant assets, an insolvency practitioner will usually be appointed to act as trustee. The OR must decide within twelve weeks of the bankruptcy order whether to call a meeting of creditors to appoint a licensed insolvency practitioner. In certain circumstances the Department of Trade & Industry (DTI) or the court may make such an appointment. Where no insolvency practitioner is appointed the OR acts as trustee.
As a result of the bankruptcy order the bankrupt loses any rights to his property and the OR, or appointed trustee, can sell the bankrupt’s assets to pay his creditors. However, certain goods aren’t treated as assets for this purpose, for example, equipment needed by the debtor for his work or basic household equipment.
There are special rules regarding the bankrupt’s home. Generally speaking, if the bankrupt has equity in a house, it may have to be sold. This will depend on who owns the property, the value of the home, and whether the property is worth more than the remaining mortgage. This is called ‘equity’. It may be possible for the joint owner or family and friends to make an offer to the OR to buy out the bankrupt’s share of the equity. This is particularly helpful if there is little or no equity.
The OR can look at the bankrupt’s income and decide if payments should be made to his creditors. The bankrupt may be asked to sign an ‘income payments agreement’ to pay fixed monthly instalments from his income for three years. The trustee may also claim any property acquired by the bankrupt after the bankruptcy order, such as assets left to him in a will.
During the bankruptcy the bankrupt is subject to certain restrictions. He must not:
- Borrow more than £500 without telling the lender he is bankrupt
- Act as a director of a company without the court’s permission
- Create, manage or promote a company without the court’s permission
- Manage a business with a different name without telling people he does business with that he is bankrupt
The bankrupt will usually be discharged from bankruptcy automatically after one year, or even sooner if the OR decides to close his file early. However, if the bankrupt has behaved irresponsibly (for example, by not cooperating), bankruptcy can last for much more than one year.
Once discharged, the bankrupt is released from his bankruptcy debts, with some exceptions such as court fines, matrimonial debts and certain student loans.