Bankruptcy is something that should not be taken lightly. Whilst bankruptcy may be appropriate in some circumstances it must be remembered that there are significant consequences.
We have put together a summary of the bankruptcy restrictions to help you decide if bankruptcy is right for you.
Creditors and debt
Once you are made bankrupt, the Official Receiver will notify your creditors of your new circumstances. The trustee will then inform the creditors how much they will be receiving through the bankruptcy, once the costs of the bankruptcy proceedings have been paid. Your creditors will then make claims for payment directly to your trustee.
Employment and bankruptcy
Employment prospects remain largely unchanged, although certain careers exclude bankrupts.
Examples of these include being an MP, accountant, solicitor, recruitment to the armed forces or police (bankruptcy whilst serving may be less harshly treated, depending on your circumstances), councillors, school governors, estate agents and post office workers.
Whilst being an un-discharged bankrupt you may not be permitted to hold the position of Director in any company.
With any of the employment restrictions outlined above, once you have been discharged from the bankruptcy, these restrictions should be lifted.
We would be able to advise you further on this should you have any concerns.
Wages and bankruptcy
If you have more income than you need to meet reasonable living expenses the Official Receiver or trustee will ask you to make an Income Payments Agreement (IPA), allowing your surplus income to be paid to your creditors. If agreement cannot be reached, or in certain other circumstances, your trustee may apply to the court for an Income Payments Order (IPO).
An IPA/IPO requires you to make contributions towards the debts in your bankruptcy from your income. An IPO is only ever made affordably and will be tailored to your circumstances to ensure you will be left with enough money to maintain a reasonable standard of living. If anything changes with your income, an IPO can be increased or decreased so that you can keep the same standard of living. Our specialists will assess how much of this surplus income you would be required to pay as an integral part of the bankruptcy submission prepared for you.
IPA/IPO payments will continue for a maximum of three years from either the agreement reached by the trustee with you or the date the order is made by the court, this may mean that they continue after you have been discharged from the bankruptcy.
Benefits payments within bankruptcy
Being bankrupt will not affect your eligibility to claim benefits, nor will any of your benefits payments be used within a bankruptcy.
Will my home be affected in bankruptcy?
For many people considering bankruptcy, the future of their home is a major concern. In bankruptcy all of your possessions of value are surrendered including any interest in your home, whether it is leasehold or freehold, jointly or solely owned, mortgaged or otherwise. Control of everything you own passes to the trustee.
Your home or the interest you may have in it forms part of your estate that is used in the bankruptcy and may have to be sold to go towards paying your debts. The Official Receiver (acting as trustee or an independent trustee) is only interested in any monies that can be realised out of the sale of your property.
It may be possible for the sale of your house to be delayed until after the end of the first year of your bankruptcy, so that you can make alternative housing arrangements if you live with your spouse, civil partner or children.
Your spouse, civil partner, friend or a relative may also be able to purchase the interest in your house from the trustee. This can take place even if the interest is very small or you owe more on the mortgage than the home is currently worth. Such a purchase prevents the trustee selling the property at a future date.
The trustee may be unable to sell your home. If the equity in your home is worth more than £1,000, the trustee may be able to obtain a charging order. This provides the trustee with a legal charge on the equity in your home. The amount covered by the legal charge will be the total value of your interest in the property; when your house is sold this sum will be paid from your share of the proceeds.
Until the interest in your home is sold, or until the trustee obtains a charging order over it, the interest will continue to belong to the trustee but only for a determined period – usually three years. Any increase in value of your property will go to the trustee to repay your debts, even if your home is sold once you have been discharged from the bankruptcy.
Your home may be returned to you if, after a certain time – usually three years – your trustee has been unable to sell your home, hasn’t been able to obtain further charges or orders, or you haven’t come to an agreement.
If you rent your home and you don’t owe rent arrears, you may be able to continue living there after your bankruptcy. Check your tenancy agreement as some contain clauses requiring you to leave the property if you become bankrupt.
Your home and bankruptcy is a complex area. A consultation with one of our specialists will help you understand how your property may be dealt with in a bankruptcy and what you can expect.
How will bankruptcy affect my pension?
As long as your pension scheme has been approved by HM Revenue and Customs, it will remain outside of the bankruptcy’s estate. Your pension will remain intact and unaffected by the bankruptcy proceedings – a relief for many people considering this debt solution. The only exception to this is where your pension can be drawn within 12 months of the bankruptcy, at which point any lump sums form part of the bankruptcy estate.
If your pension scheme is not approved by HM Revenue and Customs, you may still be able to exclude it from your bankruptcy estate by making an agreement with your trustee or by obtaining an Exclusions Order. Once we are working with you, we will discuss your pension entitlement in relation to the bankruptcy and provide the appropriate advice.
If your pension does become part of your bankruptcy estate, it’s important to note the Official Receiver or the trustee can claim the lump sum and the regular payments even after you are discharged from bankruptcy.
Even if you are not receiving pension payments in bankruptcy, if you are at an age where you are entitled to draw down your pension but have yet to do so, the trustee can force you to draw down the pension and the lump sum and annuity will form part of any IPA/IPO.
Your state pension or any of its payments will not form part of the bankruptcy estate.
Other assets in bankruptcy
In a bankruptcy you are able to keep essential items to ensure that you are not hindered from earning a living. Items which will not be included in your bankruptcy are:
- Household items essential for basic domestic needs, e.g. clothes, furniture, TV, etc.
- A modest vehicle (see ‘Your Car’ section below)
- A residential tenancy
- Items needed for trade or employment such as tools and computing equipment
- Money obtained from a student loan, if a balance on the loan remains payable
The above premise is based on the fact that each of these assets are worth less than the cost of a reasonable replacement. Our advisors can offer the necessary guidance should you be unsure.
The Official Receiver should be told about all your assets and he/she will then decide whether you can keep them.
Any other assets will be used by the Official Receiver/trustee to pay the fees, costs and expenses of the bankruptcy and then afterwards to pay your creditors.
The trustee can apply for a court order restoring property that they feel has been disposed of in a way that is unfair to creditors, for instance if you transferred property to a relative before declaring bankruptcy. The trustee may also claim assets that will pass to you whilst you are in the bankruptcy, such as inheritance from a will.
Can I keep my car in bankruptcy?
If you own your car outright it will be classed as an asset. In most cases if your car doesn’t exceed what the Official Receiver/trustee considers to be a reasonable value, you would be permitted to keep it. Should the Official Receiver/trustee believe the value of the vehicle to exceed what is reasonable, there are a number of courses of action he/she could take including asking you to replace the vehicle with a cheaper alternative.
If your car is on finance, it is likely that the finance company will end your arrangement and you will have to return your car.