What will happen to my debts during bankruptcy?

question marksFrom bankruptcy order to after discharge, Fiona Gaskell, partner, outlines what to expect.

What happens once a bankruptcy order has been made?

Once a bankruptcy order has been made, the official receiver’s office, which is part of the Insolvency Service, will be notified. They will then contact the bankrupt to make arrangements for them to give full disclosure of their assets and liabilities, income and outgoings, so that an assessment can be made of how the bankrupt’s affairs are dealt with. This interview can be in person or over the phone.

Sometimes, an insolvency practitioner in private practice will be appointed as trustee in bankruptcy. Or the bankrupt’s affairs will remain with the official receiver, usually in circumstances where there are little or no assets to realise for the benefit of creditors.

It is important that a bankrupt gives full disclosure to the official receiver or trustee in bankruptcy. Failure to do so may result in the bankrupt being viewed as uncooperative, and an application may even be made to suspend the bankrupt’s discharge from bankruptcy.  

How long until a bankrupt is discharged?

In most cases, a bankrupt will be discharged from the consequences of bankruptcy a year after the order has been made. If, however, a bankrupt fails to provide information about creditors or assets, a court can suspend that discharge until the bankrupt cooperates. In certain circumstances, the suspension can be for an indefinite period.

Of course, the longer a bankrupt is undischarged, the longer they are subject to the restrictions that apply to all bankrupts which affect their ability to get credit, act as a director, and even engage in certain types of work.

Assessing creditors: who gets paid first?

Once the official receiver or trustee has details of the bankrupt’s creditors, they will write to the creditors, asking them for confirmation that they are a creditor. Creditors then complete a proof of debt form, giving details of their debt and, if required, supply evidence to support that debt. 

This is important, because a trustee, or the official receiver, needs to know the level of the bankrupt’s debts, and who is entitled to be paid. Some bankrupts may have made their own application for bankruptcy because they have no assets and no means of paying their creditors. Other bankrupts may have assets, but don't have the ability to pay their creditors in full. It is the job of the official receiver or the trustee to determine who the creditors are, and when and how they will be paid. 

There is a statutory order for the payment of creditors, and the official receiver or trustee will need to make an assessment about where a creditor will lie in that order for payment. Generally speaking, creditors who have security over assets of the bankrupt are paid out of the sale of those assets. So someone who has a mortgage on the bankrupt’s property, or has secured a judgement by way of a charging order over a property, will be paid from the proceeds of sale of that property, assuming there is sufficient money from the sale. 

If there are insufficient monies to pay secured creditors in full, the balance of any monies due will be treated just like any other unsecured creditor. If the bankrupt is an employer, certain claims by employees are treated as preferential debts. This means that they are paid prior to the general body of creditors, as are certain debts owed to the crown (though these have reduced considerably over recent years).

Most creditors will be unsecured creditors, often including the creditor who presented the bankruptcy petition. It often comes as a surprise to creditors that the mere act of making someone bankrupt does not mean that they are at the front of the queue for being paid; although, generally speaking, the costs of the bankruptcy proceedings are paid out first. 

In the majority of cases, there will be insufficient funds to pay all of the unsecured creditors in full, so it is important that all creditors give full information about the size of their debt, so that the official receiver or trustee can calculate how much is available to pay each creditor.

Generally speaking, creditors are paid on a pro rata basis, in accordance with the size of their debt against the whole amount available to pay unsecured creditors. This generally results in them receiving a payment representing so many pence in the pound.

What does discharge mean for the bankrupt?

One of the main reasons that people make themselves bankrupt is to free themselves from the burden of debts that they are unable to pay. So at the end of the bankruptcy, a bankrupt is able to walk free from the debts that existed at the time that they were made bankrupt.

Generally, creditors cannot make a claim against a bankrupt for the unpaid balance of such debts, because their claim has been satisfied by the bankruptcy and they were not entitled to pursue that debt any further. 

If, during the course of the bankruptcy, the bankrupt acquires additional money or property, perhaps as a result of an inheritance, then such property falls within the bankrupt’s estate and is referred to as ‘after acquired property’, and is available for the benefit of creditors. 

What about after discharge?

Although in many cases a bankruptcy lasts only a year, it is not at all uncommon for it to take considerably longer than this to realise a bankrupt’s assets and to make a distribution to creditors. Any money or assets that have not been realised at the time of the discharge still remain part of a bankrupt’s estate, and can be realised by the trustee for the benefit of creditors, notwithstanding the bankrupt’s discharge. 

This is an area that can cause considerable confusion for many bankrupts, who don’t always appreciate that this is the case. Typically, the sorts of matters that continue after the discharge of bankruptcy are the payments by a bankrupt under an income payments order or income payments agreement, and the sale of property, particularly the bankrupt’s home. This is because generally the courts will not make an order for possession in favour of the trustee for a period of 12 months after the date of a bankruptcy order.  

About the author

Fiona Gaskell is a partner at Clough & Willis and specialises in insolvency, property litigation and licensing. Follow @BurySolicitor.

See also: Bankruptcy and bank accounts: practical tips