24th July 2015
For an individual dealing with unmanageable debt, there are several options out there which can be used to resolve the situation, such as:
In this particular article, we shall look at bankruptcy as it’s a subject I have personal experience from (feel free to read my story).
I cannot stress highly enough that bankruptcy is a very serious matter and it is not to be entered into lightly. Always ensure you get advice before embarking down this road as another solution may be more appropriate (see here for some useful links) – bear in mind that more than one solution could resolve the problem in the short term, but they could have massively different long-term consequences. Educate yourself!
There are two ways of going bankrupt – a creditors’ petition (this is where a creditor makes you bankrupt) or a debtors’ petition (where you make yourself bankrupt). Ostensibly, there is little difference other than you have to attend court personally when making a debtors’ petition and pay a court fee (you do not have to if it is a creditors’ petition). Bear in mind that a creditor may not necessarily make you bankrupt, but instead choose an alternative method of recovery such as a County Court Judgement (CCJ) and enforced by a Warrant of Execution (getting the bailiffs in), or a Charging Order (effectively securing the debt over your home like a mortgage,) or an Attachment of Earnings Order (going to your employer and deducting monthly payments at source). In some cases, it is prudent to take matters into your own hands and go for a debtors’ petition (but this varies case by case as everyone as their own unique set of circumstances which must be taken into consideration).
When making a debtors’ petition, you can of course do this yourself (you can see the Insolvency Service guidance for bankruptcy here), although some people do prefer to engage the services of a firm to assist. The primary advantage of doing it yourself is that you don’t have to pay anyone else. However, some people do find the paperwork overwhelming and take comfort in the fact it will be professionally produced (when presenting a debtors’ petition to the court, you are required to swear a Statement of Truth and are subsequently held under the Perjury Act, so it is extremely important that the paperwork is as accurate as possible), and also welcome the physical presence/support at the court and subsequent meetings with the Insolvency Service/Trustee in Bankruptcy (if applicable).
There are some common questions/misconceptions surrounding bankruptcy which was changed following the implementation of the 2002 Enterprise Act:
1. “How long does it last?”
Assuming that you fully cooperate with the Insolvency Service and Trustee in Bankruptcy (if applicable), you are automatically discharged from bankruptcy after 12 months. Once you are adjudged bankrupt, the Insolvency Service will examine your conduct running up to the bankruptcy and if it is found that you’ve acted inappropriately for example, you could be subjected to a Bankruptcy Restriction Order which will hold you under the restrictions of bankruptcy for a period of up to 15 years.
2. “I’ll never get credit again”
Bankruptcy is a very serious matter and will have a grave impact on your credit file. During the period of your bankruptcy, you are not allowed to obtain credit from anyone for more than £500 without disclosing the fact that you are an “undischarged bankrupt”. Having said that, bankruptcy does stay on your credit file for a period of 6 years (like everything else), so in time, your credit score will repair itself providing you manage your personal finances well following your discharge from bankruptcy.
3. “I’ll lose my house”
Not necessarily. The Insolvency Service/Trustee in Bankruptcy is required to realise your “beneficial interest” in property for the benefit of your creditors. Given that this s usually the most emotive aspect in any bankruptcy, I shall address this particular point in detail in another blog.
4. “I’ll lose my job”
There are certain professions which are affected by personal bankruptcy such as solicitors (or any roles requiring the handling of client money), publicans (you cannot hold a liquor license as an undischarged bankrupt), and bizarrely, church wardens. For most jobs, there is nothing in employment law that should affect your rights should you go bankrupt – having said that, employment contracts do vary and I always advise clients to discuss their situation with their HR department (or a good employment lawyer) ahead of time just to be on the safe side. I have actually had a client who needed to go bankrupt and their employer engaged our services as they felt that without the stress and pressure of unmanageable debt, they would have a far happier and more productive member of staff.
5. “What about my possessions?”
You are required to list all your assets in your “Statement of Affairs” which is presented to the court when going bankrupt. Once adjudged bankrupt, all your assets with vest with the Insolvency Service/Trustee in Bankruptcy who will then make a decision about which assets can be realised for the benefit of your creditors. I have never personally heard of any occasion where anyone attended the home of a bankrupt to perform an audit of possessions – usually, the only assets that generate interest are high value items such as property, cars (see point 6), art and jewellery (anything that has value and is relatively easy to realise). Generally speaking, most domestic items will be deemed as exempt (as an example, you could have spent £1,000 in a TV 2 years ago – by the time someone is paid to collect it, someone else to store it, someone else to test and certify it, and finally someone else to sell it at auction, you may be left with £50 which isn’t worth the time invested). Again, this will vary case by case so do seek advice if this is a concern.
6. “What about my car?”
This is more of a grey area. The Insolvency Service/Trustee in Bankruptcy cannot do anything that will stop you from being able to work. If you need a car to get to and from work, you are usually allowed to keep one. Clearly, your top of the line Aston Martin would have to go, but the accepted rule of thumb is that cars worth up to £2,500 are usually ok (this however is not a rule set in stone and every case would be different). Having said that, I have spoken to an Official Receiver who has said they have taken and scrapped cars worth £400 (the bankrupt worked within walking distance of home), and have allowed someone else to keep a car worth £10,000 (in this particular case, the bankrupt was a GP and lives literally depended on him having a reliable car).
This article gives a general idea/guidance about the mechanics and ramifications of personal bankruptcy. If you are an individual struggling with unmanageable debt, there are no “silver bullets”. Bankruptcy, whilst a serious matter, can be by far the best solution in certain circumstances and you shouldn’t shy away from considering it due to any perceived stigma etc. The right solution will depend on your own unique circumstances and quite often, it’s the smallest detail that can make all the difference. Ignore the “guy in the pub” and get some proper advice on all options!
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.