Are all my debts included in the bankruptcy?

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Money Advice Unit Issue 2

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What is bankruptcy?

Bankruptcy is one method of dealing with your debts if you cannot pay them. If you are declared bankrupt, your assets will be shared among your creditors and, after a period of time, usually a year, most outstanding debts are written off and you can make a fresh start, subject to some restrictions. However, after bankruptcy you will find it difficult to obtain credit or get a mortgage. The effects of bankruptcy are the same whether you file for your own bankruptcy or whether you are made bankrupt by one or more of your creditors.

Therefore you should consider very carefully whether bankruptcy is suitable for you and see first if there are any other alternative solutions to dealing with your debts – see

alternatives to bankruptcy at the end of this factsheet. If your circumstances are

different, for example you are running a business or partnership, please see the section on further help and advice.

How can I be made bankrupt?

You can be made bankrupt in one of three ways:

• voluntarily - by applying yourself

• involuntarily – on application by the creditor(s)*

• if you default on an Individual Voluntary Arrangement (IVA)

* In order for a creditor to make you bankrupt you must owe at least £750 to that creditor, or, if two or more creditors are owed a combination of £750, they can petition together. A creditor must first send you a statutory demand. If you receive one of these you should seek further advice as you have only 18 days to have this set aside.

This factsheet deals with voluntary bankruptcy only.

Are all my debts included in the bankruptcy?

Most of your debts are written off once you are discharged from bankruptcy. However, there are some exceptions. The following cannot be included in your bankruptcy and therefore you will still be liable for them afterwards:

• magistrates’ court fines (except parking and road traffic offences) • student loans

• arrears of child maintenance

• debts incurred through fraud (including benefit fraud) • debts from personal injury claims against you

This list is not complete and will depend on when the debt became payable – seek advice. If a debt is in joint names, the bankrupt is usually no longer liable for the debt but the other party will be.

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How do I make myself bankrupt?

You can make yourself bankrupt by completing both a bankruptcy petition (form 6.27) and a statement of your affairs (form 6.28) and taking the bankruptcy deposit and court fee (if applicable) to your local county court with bankruptcy jurisdiction or the High Court in London. If you are applying at a county court you will also need to take three copies of each form. Forms can be obtained at your local county court or on-line at

www.insolvency.gov.uk

The petition and statement of affairs ask for details of your finances, including where you live, your family, where you work, your income (including any benefits), your spending, what you own (including any car), a list of your creditors and brief details of how you came to be unable to pay your debts, for example, illness or unemployment.

Telephone the court in advance to check that, firstly, it is the appropriate court for your application and, secondly, whether an appointment is necessary. This is important because the procedure varies from court to court and there may be a waiting time if you need an appointment. To find the contact details of your local court, see the HM Courts and Tribunals Service ‘court finder’ website hmctscourtfinder.justice.gov.uk/HMCTS/

Once you have paid the deposit and fee, which must be in cash, (currently £525 for the Official Receivers deposit and £180 for the court fee), you will be told when your

application will be heard. This is usually very soon afterwards and sometimes your application may be heard straightaway.

Fees generally increase in April of each year. Although everyone has to pay the deposit, you may have the court fee waived or reduced if you are in receipt of certain benefits or on a low income - for more details see form EX160A available from county courts or online at

www.justice.gov.uk There will then be a hearing in front of a judge who decides whether it is appropriate to make the order. This is often on the same day.

If the bankruptcy order is made, you will either have an appointment to see the Official Receiver, or more typically, the interview will be conducted over the telephone.

Official Receiver

An Official Receiver (OR) is a civil servant in the Insolvency Service and an officer of the court. They are responsible for administering your bankruptcy and protecting your assets from the date of the bankruptcy order. He or she will also act as trustee of your bankruptcy estate unless you have valuable assets when an insolvency practitioner may be appointed instead.

The OR (or trustee) is also responsible for investigating your financial affairs before and during your bankruptcy. He or she may report to the court and has to report to your creditors. The OR must also report any matters which indicate that you may have committed criminal offences in connection with your bankruptcy, if your behaviour has been dishonest, or if you have been in some way to blame for your bankruptcy. They will assess what you need to live on, decide how you can repay your creditors, which of your assets you can keep and which must be sold to pay your debts.

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Bankruptcy may not therefore be the best choice for you if you are a homeowner, have savings or expensive items of value. If this applies to you, look at the alternatives to

bankruptcy section at the end of this factsheet.

It is essential to co-operate with the OR otherwise you could find your discharge being delayed or other serious action being taken against you, including criminal proceedings. The court and OR have wide powers to deal with debtors who do not co-operate with them, such as by trying to hide assets, selling them to third parties at below their value or refusing to disclose financial details or documents.

Detailed information about the Official Receiver is available at www.insolvency.gov.uk See the end of the factsheet for details of the Hertfordshire office.

Assets

Once the bankruptcy order is granted, the OR, or appointed trustee, may wish to sell any assets that you have. Certain goods are not treated as assets, for example, clothing, bedding, furniture and household equipment for basic domestic needs. Items necessary for you to carry on your employment, such as books, tools or a car, can also be excluded. Your car is likely to be sold as an asset unless you can prove to the OR or appointed trustee that the car is absolutely necessary for ’employment, business or vocation’. You may be allowed to sell the car and purchase a cheaper one instead.

If the OR decides you have assets then they will usually be sold as soon as possible. If you are discharged from bankruptcy before any assets are dealt with they will not belong to you on discharge. Your assets will continue to belong to the OR until they are sold. The only asset treated differently is the house where you live (see below).

The OR may apply to the court for an order restoring property to him or her if you disposed of it in a way which was unfair to your creditors (for example, if before bankruptcy you had transferred property to a relative for less than its worth). They may claim assets which you obtain or which pass to you (for example, under a will) while you are an undischarged bankrupt.

What happens to my home?

If you own your home or have a financial interest in it, or any other property, you must seek help and advice before considering bankruptcy. This is very important - you could lose your home or have a legal charge made against your share of its value which would have to be paid when you come to sell your home in the future.

The trustee will sell your home if this is the only way to release your interest in the property to your creditors, unless the value of interest in your property is less than £1,000. If you have a partner or children living with you it may be possible for the sale to be put off until the end of the first year after your bankruptcy. You, your husband, wife, partner, a relative or friend may be able to buy your interest in your home from the trustee under certain circumstances, particularly when it is in negative equity.

If the trustee cannot, for the time being, sell your home, he or she may obtain a charging order on your interest in it, but only if that interest is worth more than £1,000. If a charging

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order is obtained, your interest in the property will be returned to you, but the legal charge over your interest will remain. The amount covered by the legal charge will be the total value of your interest in the property plus statutory interest (currently 8%) and this sum must be paid from your share of the proceeds when you sell the property or the trustee applies to the court for an order of sale.

Until your interest in the home is sold, or until the trustee obtains a charging order, that interest will continue to belong to the trustee, but only for a limited period (usually three years). Therefore any increase in value in the property will go to the trustee to pay your debts, even if the house is sold some time after you have been discharged from

bankruptcy.

If after three years your trustee has not: • sold

• obtained a charge over your interest in the property • applied for an order for possession or

• you have not come to any agreement with your trustee about that interest then your interest may be returned to you and will no longer be available to pay your bankruptcy debts.

A leaflet called ‘what will happen to my home?’ is available from your local official receiver's office or www.bis.gov.uk/insolvency/Publications

If you rent your home, the trustee will normally have no interest in it and therefore cannot sell it. However if you do not comply with the terms of the tenancy agreement, the landlord may take action against you. The OR may tell your landlord that you are bankrupt

depending on your tenancy. Check your tenancy agreement for any restrictions on bankruptcy.

Hire purchase agreements

Most hire purchase agreements have a clause which allows the hire purchase company to terminate the agreement if you become bankrupt. In this event, you will have to return the item. This will happen whether the trustee deems the item to be exempt from the

bankruptcy or not.

In other cases, if there is insufficient equity in the vehicle to make selling the vehicle worthwhile, the trustee might invite the finance company to repossess the vehicle anyway or allow a third party to take over the agreement. Sometimes you may even be allowed to keep the car.

Insurance policies

Generally life assurance and endowment policies will pass to the trustee unless it is part of the security of the secured loan or a third party is named as beneficiary.

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Pensions

HM Revenue and Customs approved pension schemes are not treated as assets but the income from the pension could be treated as income towards an income payment order or agreement (see below).

Wages

You will usually have to make a contribution towards your debts if you have surplus income after paying your ordinary household expenses. This will usually only happen if you have £20 per month or more available income after paying ordinary household expenses such as your mortgage, rent, household bills and housekeeping. Even though your bankruptcy will usually only last one year, you will have to carry on paying monthly instalments to the OR for another two years after you are discharged, three years in all. This is called an income payments agreement (IPA).

If you do not make voluntary payments then the OR can ask the court to make an ‘income payments order’ which will last for three years from the date of the order. An IPO should not normally be sought when the bankrupt’s ONLY source of income is state benefits.

Restrictions and offences

There are a number of restrictions that are made during bankruptcy that may affect your day to day activities.

Your bank accounts will usually be frozen by the bank once they are aware of the

bankruptcy order and any monies in the accounts will become the property of the trustee. Therefore you will need to make alternative arrangements for receiving any wages or benefits and paying standing orders, direct debits etc. After the bankruptcy order, you may open a new bank account but you will have to inform the bank that you are an

undischarged bankrupt.

Even after discharge, many people will find it difficult to obtain further credit. Information on individual insolvencies are held by credit reference agencies for at least six years.

Utility companies, gas, electricity and water, may refuse you credit and insist on a pre-payment meter or a security deposit. Alternatively you may transfer the account to someone else, for example, a partner - check your policy.

Certain kinds of employment may also be affected by bankruptcy, for example, people working as estate agents or in the credit industry. If you belong to a professional body which prohibits bankruptcy you could be struck off, for example, solicitors or accountants. Notice of the bankruptcy is registered at the land registry, advertised in the London

Gazette and recorded on the insolvency register which is available on line. Whilst you are bankrupt it is a criminal offence to:

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• carry on business (directly or indirectly) in a different name from that in which you were made bankrupt

• be concerned (directly or indirectly) in promoting, forming or managing a limited company, or acting as a company director, without the court's permission

You may not hold certain public offices, such as a trustee of a charity or a pension fund or act as an insolvency practitioner or an intermediary for a debt relief order.

These restrictions usually end on discharge.

Bankruptcy restriction orders (BROs)

The OR can apply to the court for a BRO if they think you have been dishonest either before or during your bankruptcy, if you were to blame for the situation or if you have acted in such a way as to make matters worse. This includes, failing to keep or produce records that would explain a loss of money or property, giving away assets or selling them at less than their value, deliberately paying off some creditors in preference to others, incurring debts that you knew you had no reasonable chance of repaying. The more harm your behaviour causes your creditors, in the court's opinion, the longer the BRO is likely to last. If you accept the OR’s allegations, you may offer to enter into a bankruptcy restrictions undertaking (BRU) instead. This has exactly the same effect as a BRO but does not involve going to court. As you will be admitting the unfit conduct, the period of the BRU is likely to be shorter than if the court made a BRO.

A BRO/BRU can last between 2 and 15 years and means you are subject to the same restrictions as an undischarged bankrupt (as above). In addition, the BRO/BRU can affect your employment and your ability to hold certain offices such as serving as an MP, local councillor or school governor or even exercising your ‘right to buy’.

How long does bankruptcy last?

Unless you are subject to a BRO/BRU you will usually be automatically discharged from bankruptcy after a maximum of 12 months. This period may be shorter if the OR concludes his enquiries into your affairs and files a notice in court. You will be sent a copy of the notice. If you wish, you can obtain a certificate of discharge from the court that dealt with your bankruptcy for a fee of £70.

You can also apply for a bankruptcy order to be annulled if you have paid all the debt in full or the bankruptcy order should never have been made.

If you are making payments under an IPO or IPA you must continue to make these payments even after the date of your discharge.

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What happens when bankruptcy ends?

After you are discharged you are released from most of the debts that you owed apart from non-provable debts (see above). When you are discharged you can borrow money and carry on business without the restrictions that apply during bankruptcy. However, you will find it more difficult to obtain credit or even open a bank account as you must declare, if asked, that you are a discharged bankrupt.

Any assets that the OR held or claimed during the bankruptcy are not returned to you on discharge. It may be some time after your discharge before all your assets, such as your home, are dealt with. The OR or trustee has three years from the date of your bankruptcy to deal with your home.

Tax

If you are employed you do not have to pay any PAYE in the tax year of your bankruptcy. However, as this means your take-home pay will be higher, you may have to pay some towards your debts. Any rebate due will belong to the trustee.

Alternatives to bankruptcy

There are other alternatives to bankruptcy. Debt management plans that reschedule your debts, an administration order, an individual voluntary agreement or a debt relief order may be more suitable. These are mentioned below but more detailed information is available at

www.bis.gov.uk/assets/insolvency/docs/publication-word/alternativestobankruptcy.doc

Debt management plans

You could write to your creditors setting out your financial position and detailing your income and necessary expenditure to see if you can negotiate affordable payment arrangements. Non priority creditors should be offered repayments on a pro-rata basis. See ‘How to manage your debts’ – a self help pack on www.hertsdirect.org/benefits

Administration orders (AO)

An administration order allows you to pay all your debts by making a single monthly payment into your local county court, which includes the cost of the order. The court then divides this payment among your creditors. Generally, your creditors can take no further enforcement action while you have an administration order or charge interest on the debt. You can ask for a composite order if you are unlikely to clear your debts in a reasonable time. This usually means that after three years of paying the court, the rest of your debts will be written off.

To get an administration order you must have:- • total debts of under £5,000

• at least one county court or high court judgment • at least two debts

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Apply on form N92 (application form) and see N270 (notes to help fill it in). The form is available from: www.justice.gov.uk/forms/hmcts

Individual voluntary arrangements (IVA)

An IVA is a formal arrangement to repay your creditors. You will either need to be able to raise a lump sum to pay your creditors or, more usually, make regular payments from your income to your creditors. An IVA is arranged through an insolvency practitioner (IP) who will charge you for this. Do not pay an organisation to find an IP for you. A directory of IPs is available on the Insolvency Service website www.insovency.gov.uk or the Association of Business Recovery Professionals www.r3.org.uk or you could use one of the free debt advice agencies listed at the end of the fact sheet.

An IVA normally lasts for 5 years. If the terms of the IVA are not kept, either your creditors or the insolvency practitioner can apply to the court to make you bankrupt. You can get the names of local insolvency practitioners by contacting the county court or official receiver offices.

Debt relief orders (DRO)

Another alternative to bankruptcy, for people on a low income, is a debt relief order. In order to be eligible you need to have total debts of no more than £15,000, assets of no more than £300 (you can have a car valued at up to £1,000), and a disposable monthly income of £50 or less.

The fee for a debt relief order is £90, which covers the OR’s costs for administering your affairs. Applications for a debt relief order are made through a “debt advice intermediary”, for example, an advice worker at your local citizens advice bureau who has been accepted by the Insolvency Service as being a DRO Approved Intermediary. Like bankruptcy, people will usually be discharged within a year and, with a few exceptions, any remaining debts will be written off.

Further information on the alternatives to bankruptcy are available at

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Further help and advice

Citizens Advice Bureaux (CAB)

Legal help and advice

CAB Advice Line: 0844 4111 444

Online information: www.adviceguide.org.uk

Information about local CAB opening times: www.hertfordshirecab.org.uk

Civil Legal Advice

Legal help and information

Helpline: 0845 345 4345/0345 345 4345

Online information: www.gov.uk

Official Receiver's Office (Hertfordshire):

1st floor, Trident House,

42-48 Victoria Street, St Albans, Herts, AL1 3HR

01727 832233 Fax: 01727 732400

The Insolvency Service:

PO Box 203,

5th Floor, 21 Bloomsbury Street, London WC1B 3QW

0845 602 9848

www.bis.gov.uk/insolvency

Business Debtline:

Offers a free, confidential and independent helpline for self-employed people and small businesses who have debt problems.

0800 197 6026 (Mon - Fri 10 a.m. - 4.00 p.m & 24 hour answering machine)

www.bdl.org.uk/

National Debtline:

0808 808 4000

www.nationaldebtline.org

StepChange Debt Charity (formerly CCCS):

0800 138 1111 www.stepchange.org Payplan: 0800 917 7823 Email help@payplan.com www.payplan.com

You can also read and download all money advice unit factsheets from the HCC website at www.hertsdirect.org/benefits

This information is for guidance only and is not an authoritative statement of the law PRODUCED BY THE MONEY ADVICE UNIT