Fiona Gaskell, partner, addresses some of the most frequently asked questions about bankruptcy.
An individual is declared bankrupt either as a result of a creditor presenting a petition, or the bankrupt themselves doing so.
The minimum debt for a petition by a creditor increased from £750 to £5,000 on 1 October 2015, and a new procedure, which will take debtor applications out of the courts, may come in to force in April 2016.
However, whether you are made bankrupt, or whether you apply to become bankrupt, the consequences are the same.
Myth #1: You lose everything (or can hide assets)
Once a bankruptcy order has been made, all of the property belonging to, or vested in, the bankrupt at the start of the bankruptcy, and any property that’s acquired during the period that the bankrupt is made bankrupt, known as ‘after acquired property’, is treated as the bankrupt’s estate (S.283, Insolvency Act 1986).
It is the precise extent of what is comprised in the bankrupt’s estate that causes considerable confusion and anxiety for potential bankrupts. Often people assume that if they are made bankrupt, they will lose literally everything that they have. Equally, there are others who are confident that if they are made bankrupt, they will be able to hide away their assets so that their trustee cannot find them, and they will be saved from their creditors. Neither of these propositions is completely true.
Although Section 283 looks as though it literally catches everything that belongs to the bankrupt, that provision does go on to exclude tools, books, vehicles and other equipment necessary for the bankrupt to use personally in their employment, business or vocation, generally referred to as ‘tools of the trade’. It is also excludes clothing, bedding, furniture, household equipment and provisions necessary for satisfying the basic domestic needs of the bankrupt and their family.
In practice, what this means is that if the bankrupt is someone who requires certain tools or equipment to enable them to work, they will not be taken. If the bankrupt can’t work, they can’t earn a living and generate some surplus that can be used to pay creditors. Similarly, it would be extremely harsh if every personal item belonging to the bankrupt was taken away – it’s difficult to see how anyone could function in a normal way and go out and work if they have no bed to sleep in, and no cooker to make their evening meal. Also, a trustee won't remove items where the costs of removal and sale would give little or no return to the estate.
Myth #2: You won’t be able to keep your car
Lots of people ask if they will be able to keep their car. This obviously depends on whether it is actually owned by the bankrupt, or is subject to finance and the value of the vehicle. Clearly, there is a difference between a bankrupt being able to retain a vehicle of modest value, needed to transport them to their place of work, or to visit customers, and a high-value prestige motor vehicle. It would be difficult for a bankrupt to persuade a trustee that they need a supercar to travel to work when a mid-priced family saloon would do the job just as well.
Myth #3: You can’t work when you’re bankrupt
Another myth concerning bankruptcy is the bankrupt’s ability to work.
It is never in the interests of a trustee, or the bankrupt’s creditors, to prevent a bankrupt from working. Though there are some limited exceptions, such as not acting as a director of a company, except with the permission of the court, a bankrupt should be able to continue working. However a bankrupt should be aware that they have a very restricted ability to obtain credit and to trade in business, and generally, the obligation is on the bankrupt to disclose the fact of their bankruptcy to any potential creditors.
Myth #4: Everyone will know you’re bankrupt
Another worry for potential bankrupts is the prospect of all of their family, friends and neighbours knowing that they have been made bankrupt. While official notices of bankruptcy are placed in the press, The Gazette and on the Insolvency Register, these are more likely to be read by financial institutions than the bankrupt’s next door neighbour.
Myth #5: Automatic discharge is more likely if you do nothing
Following the reduction in the period of bankruptcy from 3 years to a year, there has been an assumption by many debtors that if they simply keep out of the way of their trustee for a year, the bankruptcy will automatically come to an end, and they will be free to carry on as before.
Trustees are, of course, all too aware that they have only a short period of time to obtain an income payments order or enter into an agreement, as this must be done before the bankrupt’s discharge. So a bankrupt who fails to cooperate with their trustee is more likely to face an application to suspend the automatic discharge until such time as they do cooperate.
Myth #6: Giving away assets keeps them safe from creditors
Another myth is that a bankrupt can give away, or otherwise dispose of assets, before they are made bankrupt, with a view to keeping them out of the reach of creditors. The Insolvency Act has a number of different ways of identifying and overturning these antecedent transactions.
If a bankrupt attempts to put someone, such as a creditor, in a better position than they would have been in the bankruptcy, then this is viewed as a preference (S.340, Insolvency Act 1986). Such a preference can be set aside, even if it took place up to 2 years before the making of the bankruptcy order, if the person who has benefited is an associate of the bankrupt, generally a relative, or someone with a close personal connection, such as an employee. If this occurs, the trustee may attempt to claw back the payment from the person who has benefited, so that it goes back into the bankrupt's estate for the benefit of the creditors as a whole.
If a bankrupt tries to dispose of assets either by making a gift, or selling them at less than their true price, this would generally be referred to as a transaction at an undervalue (S.339, Insolvency Act 1986), and again, can be set aside if it took place at any time within 5 years prior to the making of the bankruptcy order.
There is a further provision often referred to as 'transactions defrauding creditors' (S.423 Insolvency Act 1986), which works in a similar way to a transaction at an undervalue for a bankrupt who was insolvent at the time of transaction (or the transaction made him so). But there is no time limit on how far back a person seeking to overturn that transaction can go if they can establish that it was done for the purpose of putting an asset beyond the reach of creditors. Unlike a preference, or a transaction at an undervalue, where the person making the application must either be the official receiver or the trustee, the fraudulent transaction application can be made by a victim of the transaction, so potentially any creditor who has suffered from the transaction.
While a bankrupt may think that there is little risk of their trustee knowing about any gifts or disposal of assets, they should be aware that creditors often take a keen interest in the affairs of someone who owes them money. If they think that a bankrupt has been dishonest, a creditor may well contact the official receiver or trustee with information about the bankrupt’s assets.
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