What Happens when Filing for Bankruptcy?

Bankruptcy is a formal insolvency procedure for individuals, designed to release an individual from their debts when they can no longer pay them, and allowing creditors to be repaid fairly.

Alternatives to Bankruptcy

Before filing for bankruptcy, it is important to assess your options, as there exist alternatives that can can be used and may be more appropriate. These are best suited to those whose financial circumstances are likely to change in time.

Individual Voluntary Agreement (IVA)

An IVA is a legally binding agreement constituting a plan made between yourself and your creditors to pay off all or part of your debts over an agreed period. This renegotiation must be approved by your creditors, and then supervised by an insolvency practitioner.

Debt Relief Order (DRO)

DROs offer a solution to those individuals with debts lower than £30,000 with little or no disposable income and who do not own their home or have other proprietary interests. In these instances, you are still required to pay your rent, bills and other certain debts (for example, child support or magistrates’ court fines).

Commencing bankruptcy proceedings

If your circumstances are unlikely to change, and there exists little possibility of paying your debts off within a reasonable time, commencing bankruptcy proceedings may be the most suitable option.

Bankruptcy proceedings begin when a bankruptcy order is made to the court, typically by the individual themselves, or by a third party, such as a creditor. These applications can be made in two circumstances:

• Where the individual is unable to pay their debts
• The individual has failed to comply with the terms of an IVA.

Filing for bankruptcy yourself

An individual can seek to declare themselves bankrupt via an online application to the adjudicator, who has 28 days to reach a decision (extendable by 14 days if further information be required). Applications (costing £680) can only be made on the ground the individual is unable to pay their debts.

To be granted, this application must also meet the following statutory requirements:

• The individual’s main interests are in England or Wales, they are domiciled here, or have been ordinarily resident or conducted business here at any time in the preceding three years
• They are unable to pay their debts
• No bankruptcy petition is pending in relation to them
• No bankruptcy order has been made in respect of the debts listed within the application

Where a (third party) creditor files

Here the creditor must be owed at least £5,000 by the individual and for a liquidated sum, payable either immediately or at a certain future point. The individual must appear to be unable to pay the debt - or without reasonable prospect of doing so - and the creditor must serve a statutory demand on the individual to establish this. A creditor also needs to conduct an official search for pending bankruptcy petitions against the individual.

The court can then either:

• Cease or delay proceedings, giving the individual a final opportunity to pay the debt or further time to present evidence
• Dismiss the petition where the individual’s offer to secure for the debt has been unreasonably refused, or the debt discharged
• Make a bankruptcy order

Obligations of the bankrupt individual

Where an order is granted, an ‘Official Receiver’ (OR) will be appointed. An OR is an officer of the court who takes over management of the insolvent’s estate. This role (non-exhaustively) includes investigating the affairs of the bankrupt and distributing assets to the bankrupt’s creditors.

The bankrupt individual must deliver to the OR:

• Possession of assets within the bankruptcy estate
• An inventory of their assets
• All books, papers and records relating to their estate and affairs

They must also cooperate by:

• Providing information (for example, an increase of income or acquisition of property after order)
• Attending meetings
• Undertaking other acts as required

What happens to your assets?

The OR will decide what happens to your assets:

• Generally, individuals can keep everyday items such as clothing and things required for work, but they can replace them with cheaper alternatives if they are valuable.
• Your home can be sold depending on your equity once any secured debts such as a mortgage is repaid. There are various restrictions in place if you are not the sole owner or you live with a partner or children
• Your car will be sold unless it is needed for work or domestic needs and alternative transport is not suitable. It can be replaced with a cheaper alternative.
• Your bank account is frozen, and the OR can release funds for daily living needs. A different bank account can be opened but you must declare your bankruptcy status.
• Regular debt payments will be made from your income where possible via an income payment agreement (IPA)
• Pension schemes are generally excluded. However, pension payments during proceedings can form part of the IPA used to pay off debts.

Consequences of bankruptcy

In most cases, the bankrupt individual will be automatically discharged from bankruptcy 12 months after the order.

You will be freed from your debts, except for:

• Student loans
• Court fines
• Debts created after the order
• Damages for personal injuries
• Family proceedings payments (child or spousal maintenance)
• Debts gained by fraud

Discharge does not bring the process of asset realisation and distribution by the OR to an end, and creditors owed a bankruptcy debt remain entitled to their share of the asset realisations. You must also continue to make payments under any existing IPA. If your family home has not been dealt with 3 years after the bankruptcy order, the interest may be given back to you.

Bankruptcy will remain on your credit file for six years following the making of a bankruptcy order, after which you must check for its removal. However, you will be removed from the Individual Insolvency Register within three months following discharge.