Bankruptcy

Option # 4/ Bankruptcy

Stigma? What Stigma?

And here we come to the nitty-gritty.

Not so many years ago, going personally bankrupt could be a tragic experience. People lost not only their homes, but just about everything in them, apart from the odd stick of essential furniture and the tools of their trade. In my own sorry case, as a writer by trade, the bailiff would have allowed me the luxury of retaining a pad and a pencil — and perhaps a dictionary. Apart from that I'd have been left standing in my boxers!

As an aside, it's also worth sparing a thought for debtors past. As recently as the late nineteenth century, debtors who could not satisfy their creditors were sent to jail. One third of the notorious Newgate Prison (since demolished to make way for the Old Bailey in 1910) was set-aside especially for debtors to languish in the misery of their follies. So cheer up! Things could be worse!

Luckily for us, we live in more enlightened times. These days we even have celebrity bankrupts including Jeffery Archer, Kevin Maxwell, Chris Eubank, Michael Barrymore, Neil Hamilton, Jonathan Aitken, Kim Basinger... (soon to be followed by Michael Jackson?) The list goes on.

Bankruptcy, it would seem, is less of a cause for shame and more of a trapping of success. I prefer to look at it as a shedding of old life for new. Just as with the mythical phoenix, we arise reborn from the ashes to take on the world afresh.

Take comfort also in the knowledge that many successful entrepreneurs have been bust. But instead of lamenting their lot, they used the valuable lessons that insolvency can provide and went on to rebuild their fortunes on the ruins of their experience.

Bankruptcy. The facts:

What is Bankruptcy?

Bankruptcy effectively writes off ALL* of your debts. It is especially recommended when your debts are overwhelming and there is little prospect that you will ever clear them by any other means.

That said, although bankruptcy has traditionally been seen as a last resort, recent changes in legislation and a new leniency on the part of the state in favour of the individual has made it an almost attractive prospect, even if your level of debt is relatively low.

Mindful of this growing perception, and lest you adopt a flippant approach to your impending ruin, the Insolvency Service's official guide to bankruptcy issues a grim warning:

"Bankruptcy is a serious matter. You will have to give up any possessions of value and your interest in you home. It will almost certainly involve the closure of any business you run and the dismissal of your employees. Bankruptcy will also impose certain restrictions on you".

The Insolvency Service is overworked, and if they can put you off, they will. There is at present an epidemic of personal insolvencies — an all-time record. And it is only set to increase. The irony is that the banks have brought it upon their own heads through irresponsible lending. I believe that the softening of the bankruptcy laws is the government's own way of regulating the problem, in a move to rap the banks across the knuckles and to force them to sharpen their act.

The Official Receiver

The Official Receiver is the court officer who handles the administration of your bankruptcy. The Official Receiver will agree what is to happen to any assets you may have and, in cases where you have sufficient income to make regular payments, how much the payments should be and how long they will be made for. After a Bankruptcy Order is made they will inform your creditors. Creditors can then take no further action against you.

When you go bankrupt it means that any significant assets you may own, such as equity in your home, become the property of the Official Receiver. Your bank accounts will be frozen and closed.

These days, the Official Receiver is no longer interested in seizing your everyday possessions — TV, Hi-Fi, furniture, etc. He defines 'significant' assets as those that could be replaced with cheaper alternatives, e.g. antique furniture, or an expensive car. And even then, only those that he knows about, or can prove to exist. Unless you're a high profile case, or he has a very good reason, (e.g. has been informed by a disgruntled creditor) or if you have been made bankrupt by a third party and you haven't responded as instructed, the Receiver (or his representative, the bailiff) is unlikely to pay you a home visit to confirm that your declaration is accurate.

There just isn't the manpower!

NB

Although the law was recently relaxed to reduce the bankruptcy term from three years to one year, if you are in receipt of a regular surplus income, the Official Receiver can apply for an 'income payment order'. In theory, this can be claimed for three years, not just the one year of bankruptcy. This is unlikely to be enforced in the event of a typical low-profile bankruptcy.

What will happen to my home?

Understandably, this is by far the number one concern of most homeowners faced with the prospect of bankruptcy.

Here are the facts in brief:

When you go bankrupt, the legal title of your home will transfer to the Official Receiver or trustee. (Unless your home is jointly owned, in which case the Official Receiver will apply a restriction on an equal share of the beneficial interest of the property. The beneficial interest is the difference between what the property is worth and what is owed on the mortgage or any other loan secured on your property — i.e. what is left over if the property is sold.) If a restriction applies, it means the property cannot be sold without the knowledge and permission of the Official Receiver. If the beneficial interest in your home is less than £1,000, then it is unlikely that your home will be included in your bankruptcy.

NB

If you are unable to find a buyer for the beneficial interest, then the Official Receiver is likely to sell your home to release its value for distribution to your creditors. If there is money owed on mortgages or other loans secured on the home, these will be repaid first from any proceeds of the sale. The beneficial interest is calculated after deducting these amounts.

NB

If your husband, wife and / or children are living with you, the Official Receiver will normally not sell your home for at least one year from the date of your bankruptcy, the aim being to allow you time to make alternative arrangements.

NB

Your car

Unless it is considered too grand for your needs, and so long as you are able to demonstrate to the receiver that you need your car to run your business, or to travel to work, then you will be able to keep it. And even in they do decide to take it, they will then sell it back to you for a minimal cost. Strange but true.

NB

I've heard of cases where people have neglected to declare any number of items, including cars, caravans, antiques and cash without any adverse consequences. Likewise, I've heard of occasions where people have asked friends and family to 'look after' certain assets and heirlooms during the period of their bankruptcy. This is, of course, against the law. It could land in deep do-do and is not recommended. And although the Receiver may be overworked, he isn't stupid. If you've left a paper trail to that Porsche 911 you've got parked in the garage, he'll be coming for it!

Going bankrupt also restricts you (until discharged) from obtaining credit of more than £500 pounds without first declaring to the lender that you are bankrupt. However, this is all rather academic. To be realistic, if you've come this far, whatever path you take will have destroyed your credit rating with equal efficiency, and that's assuming it wasn't destroyed already (see the section below, and the 'six year rule').

How to go bankrupt

You can petition for your own bankruptcy by obtaining the forms from your local County Court (The Petition: Insolvency Rule form 6.27 and The Statement of Affairs: Insolvency Rule form 6.28). Just phone and ask. Alternatively, you can download and print your own forms at www.insolvency.gov.uk

The forms are easy to complete, and come with detailed notes. But if you require help, the CCCS will willingly walk you through the forms (by phone) or visit the Citizens' Advice Bureau, where you will receive expert assistance in person.

A fee is payable when you attend the Court with your petition. The current cost is £325 plus a Court fee of £150. (Payment is in cash only — do not even think about offering a cheque or plastic. You'll be sent away amid roars of derisive laughter!) In some circumstances, for example if you are living on benefits, the Court fee of £150 will be waived (take evidence of your status with you when you attend Court, and inform them in advance of your intention to make sure that you have the right documents with you when you arrive).

The £325 is non-negotiable!

The Insolvency Service also produces some very informative free booklets and leaflets, including:

• A Guide to Bankruptcy
• Dealing With Debt - How to Petition for Your Own Bankruptcy
• What Will Happen to my Home?
• What Will Happen to my Bank Account?

All available from: www.insolvency.gov.uk

There is also a telephone enquiry line 0207 291 6895.

So long as you don't antagonise them, the Insolvency Service can be real pussycats, and (in face to face scenarios and strictly off the record) an excellent source of help and advice.

Discharge from bankruptcy — how long?

In England and Wales, you will automatically be discharged from your bankruptcy after one year. (Three years if you live in Scotland.) In some cases you may even be discharged after six months, if the Receiver has "concluded his enquiries into your affairs", especially if you didn't go under owing money to the Inland Revenue or Customs and Excise. Don't ask me why.

Longer periods may apply if you have "not carried out your duties under the bankruptcy proceedings" (e.g. they found the Porsche 911 hidden in the garage!) or if you have a significant surplus income to pay into your bankruptcy, such as an inheritance or a win on the lottery — dream on!

Future Credit

When you are discharged you can, in theory at least, obtain credit again. That said, no lender will consider giving an unsecured loan to a recently discharged bankrupt. However, if you have managed to retain your home, then there are lenders who specialise in granting secured loans to discharged bankrupts. Bear in mind that even if you do keep your house when you go bankrupt, it will have been stripped of equity by the Receiver. This will be taken into account by your lender, and therefore limit the amount you are able to borrow.

Needless to say, as a high-risk borrower you will pay a hefty interest premium on any new borrowings.

For the wealth of detail on bankruptcy, visit: www.insolvency.gov.uk

It's a great website.

NB

It is also possible for any of your creditors to petition for your bankruptcy if you owe them more than £750, but it is rare, for reasons of cost vs. return, discussed earlier. That said, some smaller creditors, such as local suppliers, who might have taken things personally, will bankrupt you purely as an act of revenge, and view it as money well spent!

The following debts will sit outside of your bankruptcy:

1/ Secured loans (i.e. mortgage and any other loans secured on your home, including Charging Orders — see below). If your home is included in the bankruptcy and is sold, any secured loans (including Charging Orders) that remain unsatisfied after the sale of the property will be written off.

2/ Debts arising from fraud

3/ Maintenance assessments made under the Child Support Act

4/ Student Loans — scandalous, but true! (N.B. The government sells on all student loans to private banks.)

Who will know that you have gone bankrupt?

Your Bankruptcy will be reported in your local paper and the London Gazette. The Official Receiver will contact your creditors.

Do not be alarmed. Only very sad people who have nothing better to do with their inconsequential lives read the 'bankruptcies' column.

Real friends will not judge you. Any 'friend' who does is not worth having. Also it is remarkable how people rally round in your time of need. I was overwhelmed by the kindness of people, some of whom I barely knew before I needed them.

Unless you owe them money, it is unlikely that the Official Receiver will contact your employer or your landlord. Although some paid debt management companies will frighten you into believing this is the case in order to get you to sign up to an IVA.

*What will happen to my credit rating? The 'Six Year Rule'.

Bankruptcy Orders, as well as records of all defaults, IVAs, late payments, re-scheduled payments, etc, etc, are kept on credit files for six years. (Your files can be acquired at Experian, Equifax and Call Credit, which are the three main databases used by the banks — see end of document for contact details.) If a Bankruptcy Order has been annulled and you provide the Credit Reference Bureau with the certificate, it will be deleted from your credit report. At the end of the six-year period, you will emerge with a clean bill of health. That said, lenders will remain suspicious, because the fact that you have NO HISTORY on your file speaks volumes in itself. That said, for all they know, you may have been living abroad for the past six years. It depends on what you decide to divulge...