How to declare bankruptcy
Bankruptcy can be voluntary, where you make the application yourself, or involuntary if a creditor applies to make you bankrupt. Bankruptcy is a formal insolvency solution which is a good option for many people who cannot afford to repay their debts. There are disadvantages to bankruptcy though, and the impacts of any insolvency solution, such as bankruptcy, can have long lasting negative impacts. In any case, you should always take specialist advice before deciding whether this is a suitable solution.
How do you declare bankruptcy?
If you have decided that bankruptcy is the right option for you, you can apply to be declared bankrupt in the UK by completing an application online via the government website. However, the process is different if you live in Scotland or Northern Ireland.
In order to make an application for voluntary bankruptcy, you must create an account online and pay a fee of £680. If you cannot afford the upfront fee, you can pay in instalments, but you will not be able to submit your application until the fee has been paid in full.
As part of the process for applying for bankruptcy, you will be asked to provide financial information about your income and outstanding debts. Your application will then be reviewed by someone who works for the insolvency service called an ‘adjudicator’. They will grant or decline your application based on the information you have provided. In practice, your application is unlikely to be declined.
If a creditor or insolvency practitioner decides to make you bankrupt, the process is different. They will first need to present you with a statutory demand for repayment of what you owe. This must be made in a prescribed form and will set out what you can do and how long you have in order to stop the company pursuing you to bankruptcy.
At this stage, you can apply to have the demand set aside if you have substantive reasons to dispute the debt. You will need to pay an application fee and submit a witness statement setting out the basis of your dispute. If you intend to dispute the debt, it is definitely worth taking specialist legal advice.
If you do not dispute the debt, your application is unsuccessful or you fail to comply with a statutory demand then an application for your bankruptcy will be made. This application is called a ‘petition’.
What happens at a bankruptcy confirmation hearing?
Once a bankruptcy petition has been made – either voluntarily or involuntarily – the case will be listed for a hearing in front of a judge, often called a bankruptcy confirmation hearing.
The purpose of this hearing is to decide whether the application should be granted and the individual declared bankrupt. At the hearing, the judge will decide on any specific terms which will apply to the bankruptcy, such as an attachment of earnings or additional restrictions. The trustee will also be appointed at this hearing.
If the petition is being made by one of your claimant companies or another third party, you will have the opportunity to oppose the application. You will need to write a full defence and give the reasons that you do not think the order should be granted. You cannot raise any defence which you have used previously if the debt is disputed.
What happens when you declare bankruptcy?
If your application is approved, you will be issued with a bankruptcy order and declared bankrupt.
At this stage, you will be contacted by an official receiver or ‘trustee’. The trustee is an officer of the court who will manage the entire bankruptcy process. Initially, the trustee will gather detailed information about your circumstances. You may be asked to complete a questionnaire or attend an interview, either face to face or over the telephone.
Your trustee will then take control of your assets and use the sales proceeds to pay any creditors. The trustee may not take any assets which you need for your employment or to earn a living, such as a van or tools. Other items which are essential for you or your family to live are also excluded from the bankruptcy, such as clothes, food and furniture.
The trustee will decide how the money will be shared among your creditors. Your trustee will manage your bank account and your assets will be frozen. Throughout the process, your assets and liabilities will be monitored closely. Any new assets you receive (for example from an inheritance or compensation claim) will be taken and sold to pay off your debts. You will also be required to contribute to the bankruptcy from your earnings. This may be required even after your bankruptcy has ended. You will, however, be left with enough income to reasonably live on.
If you are a homeowner, your home can be sold to pay off your debts. This must be done within three years of the bankruptcy order being made. If it is not, then the restrictions are lifted and your home is your own again. If your home is owned in joint names then your trustee would only be able to take the proceeds from your portion of the sale. Be very careful though as the equity of exoneration means that your partner’s portion of the equity could be deemed to be yours in certain circumstances.
You must cooperate with the trustee throughout your bankruptcy. If you do not, the order may be extended past the normal 12 months. Abiding by the trustee’s requests is one of a number of restrictions you must follow during the process. You can read more about these restrictions here.
As bankruptcy is a formal insolvency process, your name, address, date of birth and details of your bankruptcy will be published in the Individual Insolvency Register. This is a public record which anyone can search.
If publishing this information would put you or your family at risk, you can apply for a Persons at Risk of Violence (PARV) order. If this application is successful, your details will be removed from the register.
After 12 months, the bankruptcy will end and you will be formally discharged from your bankruptcy. Any unsecured debts will be cleared, apart from any exempt debts. You should make sure that you are aware of such debts before the bankruptcy begins.
What are the alternatives to filing bankruptcy?
Bankruptcy can have a significant impact on your future. You should always consider your options carefully and take specialist advice before entering into any debt or insolvency solution. There are alternatives to Bankruptcy which may be more suitable for your circumstances. These include:
Debt Management plan –
Debt management companies negotiate regular reduced payments on your behalf. You then make payments directly to the management company. Each plan is tailored to the individual and can take a number of years to complete. You will agree to repay what you owe in full. In most cases, interest will be frozen.
Individual voluntary arrangement (IVA) –
A formal insolvency process bound by a written contract. Your IVA supervisor will negotiate payments over a fixed period of time (usually three or five years) to the creditors who agree to accept those payments instead of the individual claims they had against you. Any assets you own may be demanded as part of the IVA. Most IVAs carry very high fees, so make sure you know what you will pay before entering one.
Debt consolidation loan –
This involves taking out additional credit in the form of a new loan that allows you to combine all your other debts into one ‘lump sum’ debt. You will then make one monthly payment towards all of your debts.
Debt relief order (DRO) –
Similar to bankruptcy, a DRO is a binding order of the court. They are designed for individuals with lower debts and fewer assets. You must owe £20,000 or less and meet certain qualifying criteria. Therefore, many people are not eligible for a DRO, and may opt for Bankruptcy instead. If you are eligible, this is often a very good solution.
Before you consider any route, it is important to take a step back and make sure you’re aware of your rights regarding debt. Unless you’re completely satisfied that your creditors can provide evidence to prove that you owe them the amount they claim, you should not pay them anything. CLB can ask companies seeking money from you to prove that the amount they are claiming is due. Using consumer protection legislation, we can often challenge their claims. By coming to us for specialist legal advice, you can make sure your rights are protected and avoid paying more than you need to.