IVA : What Is Bankruptcy?

Anybody with a serious debt problem should be asking themselves this question. Making an informed decision is getting more difficult due to the availability of ever growing levels of information, some good and some bad.

The first point to make is that every decision will vary depending on the circumstances of each case; therefore understanding your circumstances will affect the decision you will make.

The definition of bankrupt is "an insolvent person" which in turn means "a person not able to pay their debts". You can be declared bankrupt in two ways, either by petitioning for your own bankruptcy or by having one of your creditors petition for your bankruptcy.

The Government revamped the laws on insolvency in 2004 with the Enterprise Act. One of its aims was to simplify the process of petitioning for bankruptcy.

Any person who owes more than £750 can be declared or can declare themselves bankrupt. The only difference is who pays the costs for the bankruptcy; the end result is the same.

The cost of a bankruptcy is made up of two parts. Court fees of £150 and a deposit to the Official Receiver of £325.

These figures are subject to change periodically and should be checked at the time of petition. If you declare yourself bankrupt, then you bear the costs, however, if you are declared bankrupt by one of your creditors petition for your bankruptcy then the creditor pays the costs.

What will happen if I am made Bankrupt?

The court will issue a bankruptcy order and you will have an interview with the Official Receiver. You may also be interviewed by a Trustee in Bankruptcy if you have any realisable assets. If you have any assets they may be sold to offset any court costs and settle your outstanding debt.

The Official Receiver will look at your current financial status and make a decision as to whether you can afford to make monthly payments to your creditors. These payments will continue for up to three years from the start of your bankruptcy. If you refuse to pay you can be forced to do so through a court process known as an Attachment of Earnings Order. This is where your payments are taken out of your wages at source by your employer and paid to the court.

The court also has the power to reverse any sale of assets made before the petition for bankruptcy if it considers they were sold at a reduced market value in order to escape true payment to creditors. This power is not limited in time.

Any asset can be considered for sale in a bankruptcy. In reality the most common asset for people entering into bankruptcy will be a property. If that property is in shared ownership your share of that property will be passed to the Official Receiver. If the other party in that ownership is unable to buy back your share, and you can't find a third party to buy your share, the Official Receiver can force its sale for the benefit of creditors.

The Official Receiver may also wish to consider other assets such as time-shares, cars, stocks and shares, investments, caravans, overseas property or any other luxury goods.

The Trustee in Bankruptcy will allow for certain goods to be kept, so a modest car, any tools of the trade needed for continued employment, household contents e.g. TV, stereo, computer, settee, washing machine etc. or other non-luxury goods would not normally be at risk.

If you have any secured debts, they will not be cleared by your bankruptcy, nor will any council tax arrears, fines, CSA payments or debts from the Student Loan Company. If your secured debts are not affected by your bankruptcy i.e. your car is on a hire purchase agreement but its value is modest, and the court recognises it as something you need to keep, or if your house has no releasable equity and is not going to be sold, you must continue to maintain the monthly payments or risk having them repossessed.

If you are made bankrupt you can still work, but certain professions may be barred to people declared bankrupt, e.g. accountants, solicitors, finance industry employees, police officers, members of the armed forces etc.

Whilst bankrupt you cannot be a director of a limited company, and if you are declared bankrupt any company shares in your name could be considered an asset in your bankruptcy.

If you are in a partnership, the partnership may be dissolved and your share of any value in that partnership may be realised for creditors.

If you are a sole trader you can continue to trade, but you cannot have credit agreements with suppliers in excess of £500, which should be cleared each month.

Employees are not normally affected in a bankruptcy ,but certain employment may be restricted, especially if it involves dealing with financial matters or handling cash. If you are in doubt, you should consult your terms of employment or speak to your Human Resources manager.

The majority of people made bankrupt since the introduction of the Enterprise Act 2004 are now automatically discharged from bankruptcy after 12 months and sometimes sooner.

In some cases, however the court can impose longer terms of bankruptcy, anything up to 15 years if it feels that a larger sanction is required, though this would normally only apply in circumstances of fraudulent activities, or severely irresponsible spending.

The process of bankruptcy is in the public domain, and anybody has access to the information about your bankruptcy. To ensure that all creditors are aware of your bankruptcy, and allow them the right to claim against your bankruptcy estate should they have a financial interest in it, details are published in the press, which may include a local newspaper.

Another restriction on people declared bankrupt is that they are not able to hold high office, so, members of parliament and local politicians, including the Lord Mayor, must resign if declared bankrupt.

When the period of bankruptcy is finished you will be issued with a certificate proving that you are now "discharged from bankruptcy" meaning that you are now no longer bankrupt. However if you are making payments through an attachment of earnings order you will be required to continue paying, even if discharged, for up to three years or whatever period the court has decided.

When you are declared bankrupt your name will be entered on a register at the Insolvency Service. This register is in the public domain and it is referred to by the credit reference agencies. Your name will be on the register for 6 years after which time you can ask to have it removed.

During the period of your bankruptcy you are prohibited from applying for credit in any form, however when you are discharged from bankruptcy you can start to re-apply for credit. Creditors will automatically refer to the insolvency register for information about your credit worthiness, so getting credit is certainly not guaranteed immediately.

Rebuilding your credit rating after a bankruptcy is not impossible. Start by approaching the bank you have used through your bankruptcy, explain that you are now discharged from bankruptcy and ask them if you could have a credit card with a small limit. The idea behind this is to spend modest amounts on the card in the knowledge that every month you will pay it off in full. This will have the effect of proving to the bank, and indirectly other lenders, that you are now in a position to settle any credit each month thus improving their confidence in you. If you continue to do this over a period of time you will find that your credit score gradually improves.

Bankruptcy is a solution for people in serious debt but there are alternatives. To discover what they are or to chat to an experienced debt adviser call 0800 088 7503 or visit my IVA-Adviser.com and request any of our free guides designed to help you answer questions about your debt.

• Bankruptcy