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What is life like after bankruptcy?

For many people the idea of becoming insolvent is unthinkable, until they are faced with the prospect of having to file for bankruptcy voluntarily, or having action brought against them. This is because the worrying connotations attached to the term make people unwilling to address such issues.

We all know bankruptcy is very serious, but the situations wherein this may be a necessary course of action vary wildly in terms of severity. In fact, to file for or be made bankrupt you only need to owe £750 or more, to one or more creditors, and be unable to pay this off via any other route. Needless to say, any amount owed out seems mountainous when there’s no money to meet the repayments, but still the baseline level of debt required is relatively minor in today’s terms.

What this means is the repercussions of bankruptcy are often less terrifying than some people immediately presume, and the impact differs from case to case. For example, someone who files a petition because they owe £1,000 on a credit card could find themselves returning to relative normality faster than someone who owes out ten times that figure, logically it will take longer to repay what’s owed the higher the outstanding balance is.

Most bankruptcies will last for 12 months before discharge. This is variable depending on how your conduct is perceived by the courts and Official Receiver, who is appointed to oversee the case. Technically this ends the process, but depending on the specifics of your bankruptcy order any Income Payments Agreement or Income Payments Order, wherein you are instructed to make contributions towards the remaining debt after the sale of assets, can last for up to three years.

With this in mind life after bankruptcy is different for every individual, and depends on the circumstances surrounding their insolvency, not to mention their outlook. Some find themselves worried about what this will mean for the future, others see wiping the slate clean, with some restrictions, as a huge relief. However, there are certain factors that anyone in this situation must take into account.

Credit, for example, will be available, but not very easily after discharge. Any history of financial crisis can mark you out as a high-risk to lenders, and as such it could be an idea to look at the many credit repair services currently available. There are bank accounts that guarantee you will be accepted even after bankruptcy too, but many come at a price. Similarly, credit cards are a great way to rebuild your score, so specific products exist for bankrupts, but it’s not an easy task securing one. Meanwhile, mortgages can prove impossible to obtain without first working towards improving your credit rating.

These are just a handful of reasons why it’s always advisable to look for some independent debt advice, whether considering bankruptcy or well into the process already. No two instances are identical, and the options open to people that have become insolvent do change. As such, ensuring you have access to impartial, up to the minute information is absolutely essential to avoid making any decisions in error. By speaking to the experts it’s wholly possible for what seems like a nightmare to become far more manageable, and much less stressful. After all, this course of action is designed to help, not hinder.

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080S – BAS

Trading after bankruptcy.

When you’re in business for yourself and things go wrong financially it’s crucial to seek professional advice immediately. Any kind of insolvency will have serious implications for the future, and the impact can be ten fold when a financial crisis grips someone’s source of income.

First of all it’s important to understand that bankruptcy only applies in the business world when it comes to sole traders and individuals within partnerships. Larger firms, such as limited companies, must go down an alternative route, namely corporate liquidation. This is despite the fact most people refer to all firms going bust as ‘bankrupting’.

The bankruptcy procedure for sole traders is much the same as it is when an individual files a petition based on their personal finances alone. £750 or more must be owed to one or more creditors, with no ability to pay this back based on current income and expenditure. Once you submit an application the court appoints an Official Receiver to oversee your case. It’s essential that all documentation such as PAYE slips, tax returns, and business invoices are submitted at this time.

From here a judgment will be made as to the details of your bankruptcy order. By assessing your wages and other income against necessary expenses the OR and courts will be able to ascertain how much you can afford to contribute regularly towards any outstanding debts left unsettled after the sale of your estate. In short, this means any money you usually have left over at the end of a month will no longer be there, which in itself can mean an end to some small-scale set ups.

Capital investment in essentials may be reduced to the point where it is no longer practical for you to continue trading. Of course an individual’s livelihood must be taken into account when the terms of any payment plan are drawn up, but depending on your industry there may be insufficient funds left to truly continue competing against market rivals. A difficult predicament to be in, this isn’t the only aspect of business after bankruptcy sole traders should be aware of.

Name changes, for example, are possible after your petition is filed and insolvency declared. However, this can only happen if the Official Receiver, or where appropriate a Trustee, gives their permission. Even then, the law requires you to make the old trading name ‘dominant’ on any paperwork, such as invoices, letterheads, and similar documents that may be sent out to clients and customers. This is designed to warn people their business partner or service provider has previously fallen into extreme financial difficulties, which is useful for obvious reasons.

It’s interesting to note that from the date you file a bankruptcy petition as a self-employed individual you will have a tax holiday until the following April 5th. As such your income will increase significantly over this time, though again any additional wages will be tied up within creditor repayments. Where there is no order to contribute towards the outstanding debt within this first year the Official Receiver will not be able to calculate how much you should pitch in for any arrears over the following two. This means that in many instances, with careful planning, sole traders can avoid this instruction to make regular payments.

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What happens when council tax makes you bankrupt?

With wages in the UK remaining stagnant, if not depreciating in value as a result of the high inflation on living costs, it’s safe to say we’ve all been feeling the crunch in the post crash era. The bad news is, this doesn’t look like it will end for several years to come.

The clever money is on this age being remembered as the Second Great Depression then, and what this means in everyday terms is that people everywhere are finding it difficult to stay on top of their finances. Debts are mounting, and despite both unsecured and secured loans being harder to come by than ten years ago, borrowing is continuing to rise.

We all know of the possible worse case scenarios that can develop as a result of poor financial management. Bankruptcy is a particularly notorious word in the English language, with social stigma hanging heavy round the letters therein. As such most people make a real effort to keep debts to private firms in check- whether that’s a store or credit card, mortgage or utility bill. Unfortunately, the same doesn’t always go for money owed to the state, or more accurately local government.

Last year the Evening Standard reported Londoners had a £500million unpaid council tax bill. The apparent reason for this being ‘breathtaking incompetence’, according to the article, yet criticisms of the policy enforcers aside there’s no denying this suggests a flagrant disregard for how serious these kinds of arrears can become if they are not addressed as a matter of relative urgency. Or at least within the next 12 months.

As per the law, council tax should be paid in full, each annum, by March 31st- the end of the British tax year. If you’re not in a position to do this then it’s imperative to contact your council, who may be able to offer an alternative method of payment. This could include spreading contributions out, or fixing a date by which the balance must be settled. In cases where this is not possible the scenario is far more complex.

Initially the council can apply at a local magistrates court for a liability order. This basically instructs you to pay the full amount for the year, not just the amount you are behind by. It’s important to note that even in shared households the named council tax account holder will always be the person who has action taken against them, with the official stance being any background mess is yours to sort out, not theirs.

The liability order will be followed by a court summons, but if you accept responsibility for the bill and agree to pay in full you do not need to attend. In instances where you do not agree to the charges this hearing affords an opportunity put across your point of view, explaining the reasons why this debt is not yours.

Once a liability order is made by court it is immediately possible for the council to file a petition to make you bankrupt, providing the amount owed is £750 or more. The process here is much the same as when a private firm makes you bankrupt, or if you declare yourself insolvent. An application will be submitted to court, you will be notified of the action, and then requested to provide details of your financial background, including all income and expenditure.

After this there will be at least one interview with the Official Receiver, who is appointed to oversee your case, and then your estate will be brought into order, with a view to selling assets in order to clear the debt. Where there is a shortfall it may be necessary to enter into an Income Payments Agreement (IPA) or Income Payments Order (IPO), enforcing you to make ongoing contributions towards the outstanding amount. Bankruptcy of any kind usually lasts for 12 months until discharge, but will remain on your record for six years.

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089S – BAS

What help will I get if I make myself bankrupt, when I am on benefits?

Chances are if you’re reading this then you are already considering bankruptcy proceedings. As such the most important thing to remember is not to panic, because despite the fact the situation seems distressing at the moment, insolvency is a process that’s actually designed to help, not hinder your financial stability in the future.

To find yourself considering bankruptcy, or being threatened with bankruptcy by creditors, is certainly stressful. However, it can be far more alarming if you already make ends meet with assistance from government benefits, given the fact this indicates a low income. Common fears amongst individuals in this scenario often centre on how they can hope to survive whilst paying back monies owed when they were already living without a surplus cash flow.

That’s understandable, but it also represents a misconception of the law. In the UK, when a bankruptcy petition is approved, the Official Receiver- who will be allocated to oversee the distribution of your estate to clear debts- must take into account reasonable living costs. This means any amount you are required to pay in order to clear outstanding accounts after the bankruptcy judgment, will be decided after accommodation, sustenance (i.e. food and drink), travel, and such like has been factored in.

Perhaps putting it simpler, in the Insolvency Service’s own words: “Each case must be considered on its merits, but to maintain consistency it will be necessary for the examiner to discuss with the bankrupt the expenditure information he/she has provided, to ensure that he/she has accounted for all his/her reasonable domestic needs and those of his/her family.

“Case law (such as Re Rayatt [1998] B.P.I.R. 495 and Scott v Davis [2003]BPIR 1009, see paragraph 31.7.18) emphasises that reasonable domestic need is to be determined by reference to the circumstances of each case, which could include in some circumstances provision for dependant children to continue their private education, where it can be shown that it might be detrimental to the children to move them to a different school.”

With this in mind, most instances wherein the bankrupt’s sole income is dependent on benefits will result in no deductions being taken from those benefits in order to pay back creditors. As a general rule of thumb, consider this to be incremental; the more you earn, the less you use benefits, the more likely part of that income will be allocated to clearing the bankruptcy debts. In addition, it’s also important to note that individuals on certain types of benefits will be entitled to a reduction in the costs associated with filing a petition.

Currently, in England and Wales you are required to pay £175 to the court, and £525 Official Receiver’s fees. In some circumstances, there may be an exemption from the latter, leaving just the court costs to pay. Like most things in bankruptcy though, all decisions are judged on individual cases, therefore it’s vital you seek professional advice from a registered debt agency or charity in order to understand your own situation, and the repercussions of any insolvency proceedings that are enacted, voluntarily or involuntarily.

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093S – BAS

What is the difference between bankruptcy and an IVA?

It’s no secret the number of insolvency cases in Britain has increased over the last four years. An era that will be remembered for financial instability and austerity, the impact on individuals of high borrowing and inflation rates, low interest on savings, and a downsized UK Plc has been pronounced.

Job losses and an overall reduction in disposable income means it’s easier than ever for debts to spiral out of control. As such it’s unsurprising more people are looking at options that can offer an escape from their creditors, with bankruptcy the most widely recognised route out of a monetary crisis. Yet it may not always be entirely necessary.

An Individual Voluntary Arrangement can provide an alternative to bankruptcy with less severe consequences. This by no means should be regarded as an easy option, mind, with IVAs representing legally binding contracts wherein a debtor enters into an agreement with their creditors. Failure to adhere to this will result in further court action.

IVAs are serious undertakings then, just like bankruptcy, but there are some differences. The latter requires fees to be paid at court (currently £700 for petitions in England & Wales), will count against your credit rating, and can see property, savings, vehicles and more sold off. Ongoing contributions to creditors can also be enforced for around three years, despite discharge usually taking place after 12 months.

By comparison you will enter into an IVA for five to six years on average, yet the immediate repercussions are less significant. Anyone considering an IVA must have around £150 or more surplus income per month, and it’s extremely unlikely this route would ever result in the loss of someone’s home. Ongoing payments to creditors must be made, though, with a percentage of this also used to pay for Nominee and Supervisory fees.

Both bankruptcies and IVAs will remain on your credit record for six years, and can effect employment, depending on what it is you do for a living. Therefore it’s vital to check how either could impact on your job before making any decision to proceed. Your IVA and bankruptcy petition will be public knowledge too, as they are published on the Insolvency Register for anyone to see. Bankruptcies also have to appear in newspapers, so it’s fair to assume more people will find out if you go down this route.

Once the bankruptcy and IVA have ended you can return to relative financial normality, but during both of these processes life will be markedly different. Only basic bank accounts will be available to you, and it will not be possible to obtain credit. The most important thing to understand though is that each scenario is treated individually by the insolvency staff and courts, meaning consulting professionally trained, seasoned experts for advice before committing to any decision is crucial in order to avoid making costly mistakes. All forms of insolvency are life changing, at least in the short term if not over a longer period of time, and with that in mind it’s important to respect them as such.

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When it comes to bankruptcy and your pension your main concern will be – if you are declared bankrupt, will you lose your pension plans?

Your state pension is not eligible for inclusion in the bankruptcy estate. So long as the bankruptcy order is made on a petition presented on or after 29th May 2000 then other pension schemes approved by HM Revenue & Customs will not be included in the bankruptcy estate. As such, they will be protected against action from the trustee.

Approved schemes include:

• Pension plans registered under section 153 of the Finance Act 2004 (HM Revenue and Customs schemes, annuity contracts securing benefits under a registered scheme that do not pay immediately)
• Retirement annuity contracts
• Personal pension schemes approved by HMRC for tax purposes
• Stakeholder pensions

Other schemes are eligible, including those that are unapproved, which can be protected with a court exclusion order or qualifying agreement with the trustee.

If there are doubts as to whether your pension will be exempt or included in the bankruptcy proceedings the official receiver will contact your provider for details, and follow this with written confirmation as to what the exact situation is. In any instance, we recommend speaking to professional to discuss your pension and how it will be affected.

If your pension falls into the bankruptcy estate then the official receiver or trustee can claim both lump sum and regular payments, even after you are discharged from bankruptcy. In some situations the bankrupt may have an option to buy back interest in the policy from the trustee, a proposal that needs to be discussed with the trustee and officially agreed.

All future payments prior to discharge from bankruptcy will be eligible for the trustee to claim, even if the plan itself is excluded. This will usually be included within an Income Payments Order or Income Payments Agreement in a similar way to wages and salaries.

Should I keep up with my contributions to the pension? Well this is entirely up to you, in some cases continuing to pay into the scheme may not be in your best interests. However, depending on the terms of your plan, failing to continue paying money in may incur a forfeit.

If you die before being discharged from bankruptcy then for those with a death benefit policy, if the scheme does not nominate a beneficiary then the trustee can claim the death benefit.

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If you receive a statutory demand it is important that you deal with it immediately. If you don’t, and the debt is for £750 or more, a court could end up making you bankrupt or your company could be wound up. You have to comply with the statutory demand within 21 days and  you have three options:

• Settle the debt – pay what you owe
• ‘Secure’ the debt – reach an agreement for payment
• Dispute the debt if you believe you have good reason to. This is called ‘setting aside’ the demand

Before you take any action, you should consider taking legal advice. If you accept that there is a debt but do not have the money to pay, try to keep talking to the person or company to whom you owe the money. It is generally better to negotiate than to face a bankruptcy or winding-up petition.

Although statutory demands are relatively cheap to issue, winding up proceedings in court are much more expensive. People you owe money to are almost always better off doing a deal for lower payment/payment by instalments than getting a much lower net recovery if you’re made bankrupt or if your company is liquidated.

If the debt is for £750 or more and you don’t settle, secure or set aside the debt, the person/company that you owe money to can take further action. Statutory demands are a powerful tool and you should treat them seriously.

If you owe the money as an individual your creditor can apply for a bankruptcy order. If this is successful you could lose your home (if you own it) and many of your other assets may be sold to repay the debts you have. It may also affect your job, particularly if you work in the financial services industry or you are the director of a company.

If you owe the money as a company your creditor can apply for a winding-up order. This is the case even if you have thousands or millions of pounds in your company current account. This petition will be advertised in the London Gazette and shall be picked up by your company’s bankers. They will automatically freeze your company bank account which will in effect render your company unable to trade.

A winding-up petition is normally issued to your registered address and if you don’t responded to it or defend it, the court will issue a winding-up order. The Official Receiver will be appointed liquidator of your company and has a statutory obligation to investigate the company affairs including the conduct of directors.

If you disagree with the statutory demand as an individual, you have 18 days from the date the statutory demand is served on you to apply to the court to have the demand set aside. If you live abroad, then the time limit for setting aside the demand is 22 days.

A court will only grant your application to set aside a statutory demand if there is a genuine dispute about whether the debt exists. A mistake in the statutory demand about the amount owed will not make it invalid. 

Important. You will still be liable for your present and future council tax, including while you are bankrupt

Council Tax Arrears From a previous year

Any council tax arrears from a previous year due at the date you became bankrupt are included in the bankruptcy. Your local council will not be able to enforce this debt once you are bankrupt.

Council Tax Arrears From the current year

If before you were bankrupt, you lost the right to pay your council tax by instalments because you did not make the payments on time, you will have become liable to pay the whole year’s council tax. This debt too will be included in the bankruptcy. You will not be liable for any payments towards council tax for the rest of the financial year (April to April) as long as you remain bankrupt.

Bankruptcy Without Council Tax Arrears

If you are not behind on your Council Tax payments the remainder of you liability for the current year can’t be included in your bankruptcy and you will be required to pay it.

Can I be made bankrupt over my Council Tax ?

The minimum debt for which someone can try to make you bankrupt, usually refereed to as a Creditor Petition, is £5,000. Only in the unlikely event your council tax arrears are this much could you be forced into bankruptcy due to council tax debt.

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Can An Attachment Of Earnings Order Be Made Following Bankruptcy? Absolutely it can. It is a legal insolvency proceeding that can be brought by the County Court against anyone who does not keep up with his or her payments to the courts, as outlined in their “County Court Administration Order” (CCAO).

Let us remind ourselves what a County Court Administration Order is: It’s an alternative to bankruptcy. While certainly the most well-known of all the debt options, “Bankruptcy” is not necessarily right for every scenario that a court hears, nor is it the simple default option – just because you find yourself in debt doesn’t mean you have to become bankrupt.

As long as you owe no more than £5,000 to at least two creditors AND one of your creditors has obtained a court judgement against you that you cannot pay in full, then you might be allowed to make weekly, monthly, or quarterly payments (from your income) to the court, proportional to what each creditor is owed. This is known as a CCAO.

Clearly, a CCAO is intended to help the debtor and as such should not be broken by failing to keep up with payment plans stipulated therein. But if you did, not only will the CCAO be revoked but your creditors would also be able to resume pursuing you for the money still owed them.

And let us, in turn, ascertain what an “Attachment Of Earnings Order” is: A court directive, issued following any breach of a debtor’s CCAO, requesting their employer automatically deducts an amount of the debtor’s wages and pays it directly to the courts. The court then distributes this money to each creditor the debtor owes.

While there’s no upfront fee, the court will take 10p from every £1 handed-over by the employer, and the employer shall make a £1 admin charge for each deduction they have to make.

The sort of debts that may be subject to an “Attachment Of Earnings Order” include: credit cards, bank loans and hire purchase debts; student loan debts; income tax, VAT or TV License debts; rent or mortgage arrears. However, an Attachment Order cannot be applied if you, the debtor, is: self-employed or unemployed, in the Armed Forces or Merchant Navy.

In order to work out exactly how much of your income is deducted from your wage under an “Attachment Of Earnings Order”, the court calculates how much money you need to live on – called the “Protected Earnings Rate.” Your income is not allowed to fall below this threshold so any money owed can only be deducted from money earned above this amount.

Therefore, the times when an “Attachment Of Earnings Order” cannot be applied to a debtor is if their “take-home” pay is always less than their “Protected Earnings Rate”, or, the debtor owes less than £50 pounds.

Lastly, in Scotland an “Attachment Of Earnings Order” is known as an “Earnings Arrestment”. The differences being the creditor must have first served a “Charge Of Payment” and delivered a “Debt Advice and Information Package”. Otherwise, any “Earnings Arrestment” is deemed illegal. 

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As those working in insolvency know, people going through any procedure designed to ease debt have many concerns. That’s no surprise, as these are stressful situations, but the strain is often compounded by misconceptions and unclear information.

A key point of concern for people that have been declared bankrupt is whether or not this will affect their current job, or future career prospects. The answer isn’t particularly straightforward, either, which makes matters worse (or at least more confusing), however there is one simple fact that’s often overlooked. Bankruptcy is not a punishment, but an order of protection from creditors, and as such is designed to help the situation.

Needless to say, restricting an individual’s ability to work (and therefore make repayments on their outstanding debts) isn’t going to improve their predicament, so it makes sense that most people can continue in the same role they had up until filing for, or being made bankrupt.

 However, there are some exceptions that are important to understand before you appeal to the court, or have any action brought against you by those you owe money.

Company directors must stand down for the duration of their bankruptcy, and whilst held in this financial status you will not be able to act on the board of governors for any educational facilities, apply for a London Black Cab Licence, take up post as an MP, or become a charity trustee.

Further to this, many jobs regulated by the Financial Services Authority, legal and property based professions (i.e. solicitors, estate agents etc.) may also be affected. Similarly, it may be difficult to find work within credit-based industries, such as telecoms or energy.

In most instances the technical law, where bankruptcy affects your job, is that you must declare this to your employer, meaning redundancy will not always be the end result. This does not take into account any specific policies that are already in place within the individual business though.

With this in mind, it’s imperative to check all company paperwork to ascertain exactly what constitutes breach of contract, as many firms- including but not exclusively banks and building societies- could have specific guidelines and courses of action in place for when a member of staff becomes bankrupt.

It’s also (unfortunately) wise to consider the realities of your situation, and the ongoing job climate. Questions regarding recent bankruptcies are not completely uncommon on application forms, and adverts for good positions are currently met with an overwhelming number of CVs.

Unsurprisingly then there have been stories published in the press of late suggesting bankrupts are experiencing more problems finding work than usual, with interviewers potentially preferring candidates with a good, if not completely clean, credit history.

However, discrimination of this kind is no more legal than any other, meaning there should be nothing to stop most people continuing to work as they did before running into any money troubles, no matter how severe their circumstances appear to be.