Introduction to Insolvency and Bankruptcy
“Covid-19 has changed everything. Rules for Insolvency and Bankruptcy are also changed. Under the current economic conditions, and shrinking GDP of the United Kingdom, many companies and individuals are struggling to stay afloat. As the furlough scheme is due to end in a short time, Government and CBI’s statistics show that most companies, big and small, and individuals are heading towards forced bankruptcies and insolvencies“.
In this article, we will explore the reasons and grounds of bankruptcies in England and Wales.
Read Time: 4 minutes
What is on this page?
- Introduction to Insolvency and Bankruptcy
- Reasons for Insolvency and Bankruptcy
- Personal Insolvency and Bankruptcy
- Creditors’ Rights and Options
- Options for the Insolvent person (Debtor)
- Student Loans
- Discharge of Bankruptcy
- Application for Bankruptcy
- Required Documents
- Property of the Bankrupt
- Matrimonial Home
- Impact of Bankruptcy
Reasons for Insolvency and Bankruptcy
The common reasons for insolvency and bankruptcy in England and Wales are
- cash-flow problems, such as borrowing too much and being unable to make the repayments
- losing jobs
- being part of an unsuccessful business or partnership
- being a director of a company and incurring personal liability in some way, e.g. by giving a personal guarantee
- Covid-19 has also now sprung up as one of the reasons for insolvency and bankruptcy.
Personal Insolvency and Bankruptcy
According to the Business law, A person is considered insolvent when he is unable to pay the debt
- which is payable immediately and
- does not have sufficient funds to pay the debt which is payable immediately, although he may be able to pay the debt at some time in the future
A person is also considered insolvent where the debt is payable at some specified point in the future and the person has no reasonable prospect of being able to pay that debt albeit in future.
Creditors’ Rights and Options
The unpaid creditor who is unhappy and who has decided not to wait for any more can ask the court to declare the insolvent person a bankrupt. The creditor has to prove that the debtor is insolvent i.e. cannot pay his bills any more. The creditor has to serve a statutory demand notice however the debtor (insolvent person) can either pay the debt or apply to the court to set aside the statutory demand notice within 3 weeks of the issue date of the notice. For a creditor to use this route the value of the debt has to be over and above £500.00.
Options for the Insolvent person (Debtor)
Many people in debt tend to ignore their bills and final demands, which results in that the matters are taken out of their hands by the creditors. It is important to note that as a debtor you still have some options available. These are as follow;
- The debtor can apply online for his insolvency and bankruptcy, in order to show the courts that he is doing his best to sort out things for himself.
- The debtor can also talk to his creditors, to see if they can wait for payment or agree to a compromise.
- The debtor can enter into a formal arrangement with all his creditors, called an individual voluntary arrangement (IVA). This may be an agreement to pay the creditors a bit less, or for the creditors to wait longer to be paid. The benefit of an IVA is that it may allow the debtor to avoid insolvency and bankruptcy completely;
- The debtor can also apply for a debt relief order (DRO).
A person in debt can voluntarily apply for bankruptcy. The creditors can also apply for the bankruptcy of the debtor. It is a judicial process in which all the assets of the debtors are passed to a trustee in bankruptcy, who sells all assets of the debtor and pays as many of the debts as possible. However, if upon the sale of debtor’s asset, the debts have not been paid in full, the remaining debts will usually be discharged, and the person will be free from almost all of the debts.
It is important to note that student loans are excluded from insolvency and bankruptcy which means that the student loan will remain payable despite the bankruptcy and write off of other debts.
Discharge of Bankruptcy
Most bankruptcies are discharged after 1 year, however, in a small number of cases further restrictions could be imposed for up to 15 years and the bankrupt person or company will be subject to a bankruptcy restriction order (BRO) after the bankruptcy has been discharged.
Application for Bankruptcy
For a voluntary bankruptcy, the debtor(person who owes money) can apply online.
The current fee is £680.00 per person
The following documents and information will be required to make an online application for bankruptcy.
- wage slips
- benefits statements
- pension statements
Outgoings and debts
- bills (eg electricity, gas, water, etc)
- council tax/rates
- unpaid council tax bills from previous years
- enforcement agent or bailiff letters
- details of any benefit deductions
- court fines
- hire purchase/rental agreements
- credit card bills
Property of the Bankrupt
The property includes personal and real property. The bankrupt’s property will be sold by the trustees of the bankruptcy. However, the insolvency and bankrupt can keep some assets which are required for day-to-day living, such as: (a) tools of any trade; and (b) clothing and furniture, unless it is of high value, in which case the trustees have the power to sell the asset and replace it with something cheaper. The bankrupt is entitled to retain any salary he makes, but the trustees may apply for an income payments order if the salary exceeds a sum sufficient to meet the reasonable needs of the bankrupt.
Special rules apply to the matrimonial home. It will only be the bankrupt’s interest in the matrimonial home which will pass to the estate of the bankrupt for the sale. However, it is a complicated matter as in the matrimonial home there can be other people who may have some legal rights under family and property law. Following issues could arise
(a) the house may be held in joint names as joint tenants
(b) the spouse/partner may have contributed to the purchase price etc
(c) the spouse may also have a right of occupation under the Family Law
(d) minor children (under 18) may live with the bankrupt in his home, which may give him (and the spouse/partner) a right of occupation.
In these situations, the debtor/bankrupt cannot be evicted from his home immediately, so the trustee cannot sell it without a court order. The court will consider the interests of creditors, the financial resources of the bankrupt, the needs of the children (if any) and all relevant circumstances. During this time, the bankrupt may be able to arrange for his spouse/partner to buy his share of the property, or to find alternative accommodation.
Impact of Bankruptcy
The bankrupt will be prohibited from
- Acting as a director of a company
- Cannot be involved in the management, promotion or formation of a company
- Trade under a different name
- Continue with partnership
- Obtain credit for more than £500
- Take possession of goods under hire purchase
It will be extremely difficult for a bankrupt to obtain any credit until the bankruptcy is discharged which is usually discharged after 1 year time. However, he may be allowed to open a very basic bank account in order to receive any salary which is paid directly into a bank account.