Guide to personal bankruptcy in the UK

Here is what the Insolvency Service in the UK has to say to those considering bankruptcy:

“Before you take any action to apply for your own bankruptcy, you should get your own legal or financial advice about bankruptcy and the other options available to you. The Insolvency Service and the courts cannot advise you on specific insolvency problems; for example, whether you should go bankrupt or your company should go into liquidation, or whether you should look at alternatives. You should get independent advice. You may consult a solicitor, a qualified accountant, an authorised insolvency practitioner or a reputable financial advisor.”

Please see the “Guide to Bankruptcy” published by the Insolvency Service (reference URN10/1144).

Personal bankruptcy in the UK changed significantly in April 2004 with the introduction of the 2002 Enterprise Act. The general mechanics remain the same as the 1986 Insolvency Act, but with some key changes as well as recent procedural changes implemented by the Insolvency Service:

• Assuming full cooperation with the Insolvency Service (and Trustee in Bankruptcy if applicable), automatic discharge occurs 12 months from the date the Order was made.

• There is a maximum of 3 years from the date of the Order to deal with personal assets such as residential property. The exception to this rule is investments (such as “buy-to-let” property portfolios).

• An order made in an English or Welsh court is recognised throughout the EU and Commonwealth and will therefore encompass any debts in those member states (or indeed any other that recognises the jurisdiction of UK courts).

• Cases with little or no assets are usually kept “in-house” with the Insolvency Service rather than being passed to a private sector Insolvency Practitioner to act as Trustee in Bankruptcy.

• It is now common practice that property (with little or no equity) which is part of a bankrupt’s estate is passed to the RTLU (Regional Trustee and Liquidator Unit of the Insolvency Service). In these instances, it is common for no action to be taken for 2 years and 3 months in order to allow property prices to recover. If the property is in negative equity, a nominated 3^rd party (nominated by the bankrupt) can approach the RTLU to buy the “Beneficial Interest” (and thus conclude the Insolvency Services’ interest in the property), but offers of £1,000 or more will usually only be considered

• Since January 2011, the Insolvency Service has reviewed the situation in respect of Income Payment Agreements/Orders (IPA/IPO) under section 3.11 of the Insolvency Act. After allowing “reasonable” expenditure, all disposable income in excess of £20 per month will usually be taken for a period of three years. This can be varied up or down as the bankrupt’s personal situation changes. If a bankrupt is discharged without having received an IPA or an IPO, they cannot be retrospectively applied.

• The Insolvency Service will usually allow the bankrupt to keep their car if they need it to get to work. General guidance is that a car worth up to £1,000 is acceptable, but the Insolvency Service does look at this on a case by case basis.

• If you have a HM Revenue & Customs approved pension scheme and you are more then three years from retirement, the pension is usually exempted in bankruptcy. Any Additional Voluntary Contributions (AVC) will not usually be allowed during the period of the bankruptcy or IPA/IPO.

• If a creditor is making you bankrupt (a Creditors Petition), the Bankruptcy Orders are made at the local County Court where the bankrupt has been living for the better part of the previous 6 months, or at the High Court. If you wish to make yourself bankrupt, this is now an online application with the Insolvency Service.

• If the debts are not business related and less than £100,000, the meeting with the Insolvency Service is usually a telephone interview (normally 2 weeks after the bankruptcy) lasting about 30-60 minutes.

• For larger and/or business related debts, a more formal face to face interview with the Insolvency Service is conducted at their offices and this usually last for 1-3 hours (normally, only one meeting is required, but 2 or 3 can sometimes be needed for business related debt). The length and frequency of these meetings is dependant on the quality of the Statement of Affairs presented with the Debtor’s Petition and any subsequent submissions to the Insolvency Service

• The actual “write off” of the debt does not legally occur until the bankrupt is discharged from bankruptcy.

• If the bankrupt does not cooperate fully with the Insolvency Service and/or Trustee in Bankruptcy (or it is found that the bankrupt has behaved in an “improper” manner prior to bankruptcy), the Insolvency Service can apply to the court for a Bankruptcy Restriction Order (BRO) which will hold the bankrupt under the restrictions of bankruptcy even after discharge for a period of up to 15 years (restrictions include not being able to be a limited company director etc).