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How to... Declare Bankruptcy

Bankruptcy is often a last resort for those who are unable to pay their debts, and are unlikely to ever repay them. The purpose of this article is to help you decide whether bankruptcy is an appropriate option for you, how to declare bankruptcy and what will happen when you do.

This article is for:

  • Sole traders
  • Individuals in a partnership
  • Private individuals
  • Individuals who have made a 'personal guarantee' for the debts of a company
How to Declare Bankruptcy

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Bankruptcy law is different for businesses operating as companies and for partnerships themselves.

Insolvency

A person is insolvent if they are:

  • Unable to pay their debts when they are due; or
  • If they owe more than they own themselves, and owed by other people.

If a person is insolvent, it doesn’t automatically mean they are bankrupt. Bankruptcy is a legal term and a person can only be made bankrupt by the court.

Bankruptcy

A person who is insolvent can be made bankrupt:

  • By applying to the court; or
  • Their creditors (people they owe money to) applying to the court (if the debt is £750 or more).

Applying for bankruptcy

If you want to make yourself bankrupt you must use a Bankruptcy Petition form, along with a Statement of Affairs. Both of these forms are available from the Insolvency Service website. After the application is made, you will need to go to court though usually the hearing is very short.

The application process will involve detailing your financial situation and is designed to confirm to the courts that you're insolvent. The application process can be very detailed, especially if you are operating a business. It is also important that any bankruptcy application is both honest and accurate. A solicitor can assist you with a bankruptcy application.

Before your application can be considered, you will have to pay bankruptcy fees to the court for the following:

  • Managing the bankruptcy
  • Court costs

(The Court costs may be waived for people on certain benefits)

Your creditor applying for your bankruptcy

If a creditor wishes to make you bankrupt, they will usually send you what is known as a 'statutory demand'. This is a formal, written demand for payment of a debt.

A statutory demand will contain:

  • How much is owed
  • How the debt occurred
  • A demand for payment within a time period of no less than 21 days

If the debt remains unpaid after the time period, then the creditor can apply to the court to make you bankrupt.

If a creditor is applying to make you bankrupt, they will pay the fees. However, a statutory demand does not necessarily mean a creditor will ultimately apply to the court. It may have been a bluff to get you to pay.

If a bankruptcy order is granted

Usually, a bankruptcy order is granted by the courts. As a result, a legal obligation is placed upon the person in the order.

An insolvency professional will be appointed by the court to manage the bankruptcy. This person is known as the 'trustee'. The trustee will contact you to discuss your debts and assets in detail including how you became bankrupt.

The trustee will examine your finances and may ask questions relating to any gifts you have made to family members, or any items you have sold for less than their worth.

Restrictions

It is important to be aware of your obligations when you are made bankrupt. A person who is made bankrupt cannot:

  • Borrow over £500 without informing the lender of bankruptcy
  • Create, manage or promote a company or be a director of a company
  • Manage a business with a different name without informing those you do business with that you're bankrupt
  • Work in certain professions, such as accountancy or financial advice

These restrictions typically last for 12 months. However, they can sometimes last up to 15 years if you are subject to a 'bankruptcy restriction order'. This is used as a punishment for certain actions related to the bankruptcy, e.g. preferential treatment to some creditors and selling things for far less than they're worth.

Your assets and property

When you go bankrupt, your assets will be sold. However, you will be allowed to keep:

  • Items needed for your job, such as tools of the trade or a vehicle
  • Household items like clothing, bedding and furniture

Luxuries (for example, a very expensive car) may be sold, but you will usually be given enough money to buy a cheaper replacement. If you own your own home or any other properties, these may be used to pay your creditors. If you live at the property with your family, or the home is jointly owned this can sometimes be delayed, occasionally the property may not be sold at all. This can become complicated, If you are thinking of going bankrupt and own property you should seek legal advice.

Your bank accounts and income

The trustee will freeze your bank accounts. You will be allowed to access them for necessary and urgent purchases like food, or to release another person's money from the account if it is a joint account.

You may have deductions made from your spare income for up to 3 years after going bankrupt. This is usually only when you are still making a significant amount of money after being made bankrupt. The money is shared out between your creditors and taken after essential expenses like food and utility bills.

What to do next

When you're in financial difficulty, there will often be several options available to you and dealing with your debts can get complicated. Specifically when there are businesses and property involved.

The process can be fraught with difficulty. For these reasons, it is recommended that you seek legal advice.


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Dated: 11/11/2013

Author: Greg Cox



Bankruptcy


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