Coronavirus: Tees Law answer your legal questions on bankruptcy
In these difficult times many people will have questions and concerns around the effects of the outbreak of coronavirus on businesses and commercial relationships and what impact all this will have on our children's education.
In their latest Covid-19 Q&A, Tees' expert solicitors answer your legal questions regarding bankruptcy...
What does it mean if I go bankrupt?
Bankruptcy can occur for one of two reasons: either because your assets are worth less than your debts (known as balance sheet insolvency) or because you're unable to pay your debts when they are due (which is called cash flow insolvency).
What happens to my home if I am made bankrupt?
During the first year after bankruptcy, the court is unlikely to make an order for the sale of your home. After this, however, the interests of your creditors take priority. In this situation, the court can only refuse orders for possession and sale under very special circumstances. These conditions generally pertain to circumstances where the health of an individual will be seriously threatened if possession is granted.
Before your home can be sold, an order for possession (and if the house is jointly owned, for sale) needs to be made by the court, if you do not voluntarily give up possession of it yourself. If your co-owner opposes the order, and is unsuccessful in their attempt, they are likely to be obliged to pay the costs of the court proceedings.
How can I avoid bankruptcy?
There may be possible alternatives to bankruptcy, such as seeking to reschedule your debts with your creditors, or entering into a formal Individual Voluntary Arrangement (IVA). An IVA is an agreement according to which you agree to pay the debt (or part of the debt) to your creditors.
Generally, an IVA is likely to be the best way forward if you are balance sheet solvent, but cash flow insolvent. This is because it will buy you the time you need to realise your assets and get the monies you need together. In such circumstances, your creditors will generally require payment in full over a period of time, but may well agree to waive interest.
If you are balance sheet insolvent, more consideration needs to be given to whether an IVA is the best way forward. This is because an IVA will, in these circumstances, generally only be accepted by your creditors if it offers them a better return than bankruptcy. This is likely to mean that you will need to pay monies into the IVA for a significantly longer period than you would if you were making payments from your income after being declared bankrupt. As such, it may be better to accept bankruptcy so that you can start to move on and rebuild your life more quickly.
The Government has a number of measures in place to support businesses affected negatively by COVID-19. There now are grants and loans available to help businesses, with a focus on paying their employee's wages, to keep them employed and the business running. There is also support for individuals allowing them to delay mortgage payments and loan and credit card repayments.
It's vital that you access all available Government support and that you take specialist advice before making any decisions.
Declaring yourself bankrupt
An individual can choose to declare themselves bankrupt. This is done by completing an online form, which can be accessed on the gov.uk website The Government charges a fee for this; currently (as of March 2020), it is £680. The Insolvency Service will check that you are eligible to declare yourself bankrupt (in particular, that your main centre of economic interest is in England and Wales). If you are eligible, they will email you back, usually within the week, to confirm that the bankruptcy order has been made.
Creditors can petition for your bankruptcy
Alternatively, one of your creditors can petition for your bankruptcy. This is done through the courts, but they need one of two things before commencing their petition:
- a judgment against you, which they have unsuccessfully tried to enforce by way of appointment of a county Court Bailiff or High Court Enforcement Officer, or
- they must have served upon you a statutory demand which gives you 21 days in which to pay.
Disputing a statutory demand
If you wrongly receive a statutory demand in respect of a debt that you dispute, you can apply to the court to set it aside. This will prevent a winding-up petition being presented until the court has determined whether the demand was appropriate. It is still possible to raise dispute on the bankruptcy petition itself, but you will not be allowed to reuse arguments you raised unsuccessfully on the application to set aside the statutory demand.
I've been declared bankrupt – what happens now?
Firstly, you will receive a form from the Insolvency Service. At the same time, they will arrange an appointment for you to come in and see one of their examiners, who will go through the completed form with you. Both the form and the interview will cover questions about how you came to declare yourself bankrupt, and what assets and cash you own.
Who is a Trustee in Bankruptcy?
Your Trustee in Bankruptcy is responsible for realising your assets for the benefit of your creditors. They will attempt to get funds from your assets to pay off your creditors, either in total or in part. Your Trustee in Bankruptcy will, in the first instance, be the Official Receiver who is a government officer at your local insolvency office. However, if your bankruptcy is more complicated, or you own property, then this role is likely to be transferred to a private insolvency practitioner.
What happens to my assets if I am made bankrupt?
Ownership of most of your assets will automatically transfer to your Trustee in Bankruptcy, but there are some exceptions. The most important of these are:
- any undrawn personal pension plans;
- ordinary home contents of normal value;
- any tools of the trade;
- possibly a cheap car necessary to get you to and from work.
All other assets will be collected in by your Trustee in Bankruptcy and sold. It's unlikely that your home will be sold in the first year, but after that the court will move to put the legal processes in place to do so.
What does it mean to be discharged after a year?
Any property you acquire during your bankruptcy will be considered as part of your bankruptcy; it will therefore be available for distribution by your Trustee in Bankruptcy. After a year, however, you will usually be discharged. This does not mean that any items that you owned before being made bankrupt will be returned to you. It means that you can once again acquire property and the restrictions placed upon you while bankrupt will be removed.
Restrictions while bankrupt
There are several restrictions upon you once you have been made bankrupt, but the most important of these restrictions are:
- you cannot be (or act as) a company director;
- you cannot obtain credit of more than £500 without telling the lender about your bankruptcy. It is a criminal offence to do so.
If you have failed to co-operate with your Trustee in Bankruptcy during your bankruptcy, then they can apply to extend it – either for a set period of time or permanently, until you co-operate. Your Trustee in Bankruptcy can also apply for a bankruptcy restriction order to be made if your conduct leading up to the bankruptcy was particularly poor. This replicates many of the restrictions placed upon you whilst bankrupt for a period of time after discharge, which prolongs the period in which you are restricted.
How will my income be affected if I become bankrupt?
Your Trustee in Bankruptcy may look for you to pay part of your earnings into the bankruptcy for a period of up to three years. This is only permitted in two circumstances:
where you have agreed to do so or
your Trustee in Bankruptcy has applied to the court for an order requiring you to do so, prior to your bankruptcy being discharged.
If you have any concerns that you might be about to go bankrupt, it's vital that you seek specialist legal advice quickly, before you make any decisions about how to proceed.
David Perry is a partner specialising in insolvency law and partnership and company disputes. David can be contacted on 01245 293190 or at email@example.com
Here at Tees, we are fully equipped to work from home and are ready to assist you throughout the Covid-19 situation. Our solicitors all have experience of flexible working and remain in regular contact through Skype, email, phone and regular conference calls. Likewise, we remain available for appointments via whichever contact method best suits you. We know our clients are worried and will have questions; we can provide the answers. Just call us on 0800 013 1165, or contact your usual Tees adviser either by phone or email.