Bankruptcy (also known as sequestration in Scotland) is the legal process by which you are formally declared insolvent. This means you can’t pay your debts as they become due.
To be made bankrupt, a sheriff court has to issue a bankruptcy petition against you. This can happen for two reasons:
▪️you can apply to the court if you’re unable to pay your debts
▪️your creditors apply to make you bankrupt if you owe them £3,000 or more
Before issuing a bankruptcy order, your creditors must have issued you with a ‘charge for payment’ or a ‘statutory demand’ and the time limit for you to reply must have elapsed.
For a ‘charge for payment’ the time limit to reply is 14 days and for a ‘statutory demand’, 21 days.
When will your Bankruptcy end?
After 12 months you’re usually discharged (freed) from your bankruptcy. If you’re making a contribution to a trustee, you must continue to pay it after you’ve been discharged.
There are three main ways to become bankrupt:
If you owe more than £5000 out to your creditors, they can apply to have you made bankrupt
You can declare yourself bankrupt if your debts have become too much for you
You can be made bankrupt if you don’t keep to the terms of an IVA (an Individual Voluntary Agreement which is another way to become free from problem debt.)
Bankruptcy is not free. If you wish to declare yourself bankrupt, you must pay £680 to the court in advance, and you must pay in instalments to the official receiver managing the bankruptcy.
If you wish to declare someone who owes you money bankrupt, the court fee is £280 and the deposit to the official receiver is £750.
Either you will make a petition to the court, or someone else will petition to make you bankrupt. This means that a form will be submitted to the courts with information about who you are, where you live, how much you owe, what asset’s you’ve got, who your creditors are, whether you’ve been bankrupt before, and whether you’ve been through any other insolvency procedures in the last five years. You’ll be given a copy of any of the information given to court.
If someone else has asked for you to be made bankrupt, you’ll be made aware of it by the court. If you don’t want to be made bankrupt you’ll need to prove that you don’t owe the person applying money, or you’ll need to pay back any money you do owe them.
The first stages of the bankruptcy processes are usually managed by an official receiver, who works for the Insolvency Service. They are normally your trustee, unless an insolvency practitioner takes on that role. Your trustee explains the bankruptcy process to you and sells any goods or assets that you own which are not everyday household items or things needed to do your job.
If your bankruptcy is approved, you’ll have an interview with the official receiver, either by telephone or in person. Face-to-face interviews can take up to three hours, and telephone interviews last around half an hour. You must attend this interview and co-operate with the official receiver for the bankruptcy to run as smooth as possible. If you don’t, the bankruptcy may go on longer than the usual twelve months or you may have to attend court.
It helps to be prepared with the information the official receiver needs. You’ll need to tell them everything about your finances, including all debts, bank accounts, assets, and changes in income. You will need whatever paperwork you have to prove what you’re telling them; the receiver will tell you exactly what paperwork you’ll need before the interview. You should also tell them if you need special help (if you have a disability or difficulty), there’s anything that needs to be sorted out urgently, or you need more time to find paperwork for the meeting.
If you get a questionnaire, fill it in and return it as directed. If you don’t understand anything, note in down on the form.
Your creditors will receive a report of your assets eight to twelve weeks after your interview.
If you’ve broken the law in your financial dealings the Insolvency Service will be told
Your trustee may advertise in the newspaper to ask your creditor to make formal claims on your debt.
Your assets are sold by the official receiver or the insolvency practitioner (if you’ve been assigned one) and the money is split between all your creditors who have made a formal claim. The official receiver decides how the money is split between all your creditors who have made a formal claim. The official receiver decides how the money is split and you cannot make payments directly to your creditors by yourself, unless it is on secured debt (like mortgages), non-provable debts (like student loans, court fines, and child maintenance payments), or some crisis loans from the Department of Work and Pensions.
The money is split (in order or priority) between:
the costs of the bankruptcy
claims from any of your employers
claims from your creditors
any interest on your debts
Any money left is returned to you. If all your debts are paid in full you can ask to have your bankruptcy annulled (cancelled)
You can keep any items you need for your job, anything belonging to or exclusively used by a child (within reason), and everyday household items like furniture and clothing. If your household items are valuable they can be sold, but they will be replaced with a cheaper equivalent.
If you do not have enough assets to pay your creditors without selling your house, it can be sold as a part of the bankruptcy procedure.
If you’re the sole owner of the property, the house will be sold and any money left after paying off the mortgage will be used to pay off your debts.
If you own the property jointly with someone else your share of the equity in the property will be used to pay off your share of the mortgage and any money left will be used to pay off your debts.
If you have a partner, spouse or former spouse, or children living at the property, the trustee usually can’t sell the property without your permission for a year after the date of your bankruptcy. If after three years there’s less than £1000 equity remaining in the house then your house will not be sold and the ownership will not return to you. If more than £1000 equity remains after this time, the house may still be sold and a charging order will state the amount that will be taken from the sale towards repaying your debts.
You can stop the sale of your house if a family member or friend buys out the equity in your house. They must contact the trustee to do this.
If you fall behind with your mortgage payments, your lender may sell your home. This is not a part of the bankruptcy but can happen at the same time. You should tell your trustee if this happens to you.
If you rent your house and are up to date with your rent payments, normally nothing will happen with your tenancy. If you are behind on your rent, even if the missed payments are included in your bankruptcy, your landlord can apply to evict you. This is not a part of the bankruptcy but can happen at the same time.
You must stop using your bank account and hand over your cards and cheque books to your trustee when the bankruptcy order is made. The account will be frozen. The trustee will then free up some money for your daily needs, or for the other account holder in a joint account.
It is good to be aware that the bank is allowed to use money from one account to pay off debt on another account held at the same bank.
When you open a new account you must tell the bank or building society that you’re bankrupt.
Bankruptcy is one way for a person struggling with debt to become debt free. Your money is shared out amongst your creditors (the people you owe money too) and most of your debts are written off. There are other options available to people struggling with debt and you should speak to an expert to find out which option is the best for you.
Contact the courts for a Certificate of Discharge to prove that you’ve finished your bankruptcy. You will be free from all your debts, except for debts gained by fraud, outstanding child maintenance payments, court fines, debts created after the bankruptcy order, or damages payable to anyone for personal injuries.
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