Bankruptcy & IVA Information Centre – FREE National Advice UK
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What is Bankruptcy?
Bankruptcy can be an intimidating and frightening prospect but what is it exactly and should the idea of going bankrupt keep you up at night?
At its most basic, Bankruptcy is all about protection. It’s a way to protect yourself from your creditors if you can’t re-pay your debts. Bankruptcy prevents creditors from taking their own legal procedures against you, with the promise that an Official Receiver (usually a Bankruptcy Trustee) will help you to re-pay as many of your debts as possible.
Bankruptcy protects you from harassment from your creditors and unwelcome bailiff intrusion for a period of 12 months. This gives you breathing space to re-order your finances and attempt to pay off your debts. Your appointed Trustee will help you to do this and will work with your creditors to return as much money to them as possible.
The overall aim is to discharge you from bankruptcy, debt free, once the 12 month period is up. You’ll then be free to re-build your businesses and finances from scratch.
However, bankruptcy can be difficult. There are a number of risks that you need to know about up-front.
When you enter bankruptcy, an Official Receiver will appoint a Trustee with the dual aim of re-organising your finances and returning as much money to your creditors as possible. They do this by taking control of your remaining assets.
For example, if you own a house with a substantial amount of equity, your Trustee can sell it on your behalf, taking the residual equity to pay to your creditors. The same is true of just about any expensive asset you own – from cars to boats, artwork and machinery.
Essential assets, such as kitchen goods, as well as, in some cases, vehicles needed for work will be exempted from this forced sell-off. It is important to recognise, however, that such asset sales can make life difficult and that bankruptcy should not be entered into lightly.
Your Trustee will also make a calculation on how much you and your family need to live on. If you earn more than that amount, they will negotiate an amount that they can take from your wage until you’re discharged from bankruptcy.
A further concern will be the effect on your credit rating. While you’re in your first year of bankruptcy, you will find it impossible to open new current accounts or otherwise receive credit or loans from a bank.
Bankruptcy also has a longer-term effect on your credit score. Even after you’ve been discharged from bankruptcy, you may still find it difficult to get credit from your bank or building society. Having been bankrupt, your credit score will have fallen significantly. There are effective ways to re-build your credit after you leave bankruptcy but these may take some time to be effective.
So is bankruptcy right for you? It may be wise to ask for professional advice before you answer that question. While going bankrupt provides a great many benefits, not least of which is the promise that you’ll be free of your debts in 12 months, it has both short and long-term implications that you need to weight up.
Bankruptcy: what can they take?
One of the most common myths about bankruptcy is that it will strip away every asset you have, leaving you with nothing but the clothes on your back. That’s not true.
While the appointed bankruptcy Trustee will try to claw back as much money as they can to pay off your creditors, they won’t leave you with nothing. I’ll detail a few of the exceptions in another post (link) but here are a few of the things that a Trustee may take from you.
First up is the biggie: your house. As your biggest and most expensive possession, your home is the first thing that a Trustee will consider. What they’re looking for, however, is not the bricks and mortar of the property; it’s the residual equity that it holds.
If you bought your home for £250,000 and ten years later it’s worth £400,000 then the equity it holds is the difference between the two (in this case £150,000). That’s an attractive sum for your Trustee and they’ll almost certainly put the house up for sale.
That said, if your property is in two names and your partner has also been paying the mortgage, the Trustee will only be interested in the equity that is due to you. If your mortgage has been paid 50/50, the equity that can be taken will be split likewise. If the Trustee insists on selling the property, the remaining 50% of the equity will go to your partner.
There is another side to this as well. If the value of your house has fallen or remained static since you bought it the amount of equity that your Trustee can claw back from it could be tiny or, in rare cases, nothing at all. In this case, a Trustee could hold off from selling the house until its value rises. Remember: Bankruptcy Trustees have up to three years to make a decision on selling off property so if they don’t put up the “For Sale” signs straight away, it might not be the end of the story.
But does this mean that you’ll definitely lose your home? Not necessarily. Your partner or spouse is not automatically involved in your or your companies’ bankruptcy. As such, the Trustee may offer them the opportunity to buy your half of the house equity. Not only is this a quick, simple and hassle-free choice for them, it’ll also mean that you and your family can stay in your home. As such, it’s often the first thing your Trustee will suggest.
If you own an expensive car, motorbike or van then your Bankruptcy Trustee will have an eye on them as assets that they can sell. After property, vehicles are usually the next best chance that Trustees have for recovering money for your creditors.
If the vehicle is expensive or if you have more than one then there’s a good chance that you’ll be forced to sell them. There are a few important caveats to this, however.
The first is a matter of human rights. If you need your vehicle to travel to and from work, or if you need a vehicle to find future work, your Trustee may allow you to keep it.
This depends on the state of your local public transport infrastructure. If your Trustee decides that losing your vehicle won’t hurt your ability to make money, they’ll still take it to sell. If, however, you live in a fairly rural area, they may think twice. This also counts for your partner, if they use the vehicle to work.
That said, if you have more than one vehicle (perhaps you have a Harley Davidson for the weekend biking) your Trustee is likely to decide that you need only one of them. Even if they allow you to keep one car for work, your bike will still be up for grabs, as will any other vehicle that you own.
There is another consideration, too: price. Even if your Trustee deems that you need one vehicle for work purposes, they may still force you to sell it if you can buy a replacement vehicle at low cost.
If the only vehicle that you own is a high-end Audi then your Trustee could ask you to sell the vehicle and trade it in for a less premium second hand vehicle. The Trustee will then take any profit from the trade.
If you’re self-employed and you find yourself facing bankruptcy, you may be worrying about business assets that your Trustee might take from you. If so, there’s something that you need to keep in mind: your Trustee doesn’t want to stop you working.
If you stop working, you’ll have less money coming in to pay your creditors. If all you know is plumbing, taking away your tools, van and essential equipment would be counter-productive.
You’ll have to provide evidence that your business assets are truly essential but, if you can do so, there’s a good chance that you’ll be allowed to keep them. Bear in mind that any business vehicle must be considered as worth less than £1000. If the current market value of the vehicle exceeds this, your Trustee might ask you to sell that van and trade it in for a cheaper one, taking the difference for themselves.
That said, your Trustee will still look to recoup losses from you if your business is held in your name. If they don’t feel that you need a second vehicle for your work or if you have any non-essential equipment that can be sold off, they may ask you to part with them. Business premises may also be sold off, if they’re deemed non-essential to your work.
If you’re registered as a sole trader, they will also look to your personal possessions to re-coup your debts. These may include your home, car and and non-essential luxury items that might have.
If your Trustee decides that the equity from your house and any vehicles you own is still not enough to discharge your debts, they’ll take a look at other items that you own.
Don’t panic: they won’t leave you with nothing. As explained in the post below (link) Trustees are legally bound to leave certain essential possessions alone. Indeed, it’s unlikely that they’ll be interested in most of your low-value belongings and these will be quite safe.
What they’ll be looking for are premium, expensive or rare items that have a good chance of making money at auction.
If you have an expensive piece of art, say a painting or a sculpture that will make over £500, it is likely that you Trustee will take an interest. If they feel that there’s a good chance of making a return on the item when sold, they’ll take it from you.
It’s the same for larger items and luxuries like boats and quad bikes.
It’s important to remember that Bankruptcy protection does what it says on the tin: it protects you from your creditors. If left to a bailiff employed by the courts on behalf of a creditor, many more of your possessions would be at risk. Bankruptcy protection means that no one can enter your house and take things indiscriminately. A Bankruptcy Trustee will only look at very valuable items and will act fairly in your interest at all times.
If the Trustee takes an interest in particular belongings that you’re particularly keen to keep hold of, you may be able to come to some arrangement. If you’re able, you or a friend of yours may be able to provide a cash alternative to your Trustee in exchange for keeping certain items.
Keep talking to your Trustee. If you have questions or requests regarding particular items, give them a call. You’ll be surprised how helpful they can be.
Bankruptcy: what won’t they take?
One of the most common myths about bankruptcy is that it will strip away every asset you have, leaving you with nothing but the clothes on your back. That’s not true.
While the appointed bankruptcy Trustee will try to earn back as much money as they can to pay off your creditors, they won’t leave you without anything – far from it. Bankruptcy protection has a number of very strict rules to protect you, including rules about items that must not be taken to cover your debts.
First of all, they won’t take anything that you need to live. Clothes, bedding and furniture are all exempt from re-possession under bankruptcy rules. In very rare circumstances, where items are rare or expensive, such as rare designer clothes or jewellery, a Trustee may take an interest. This is unusual and unlikely.
A Trustee cannot take ownership of essential kitchen items such as cookers, fridges or white goods. They’ll also ignore utensils and most cooking equipment. As well as being exempt in law, many of these items have a very low re-sale value. As Trustees are mainly interested in high-value items, much of the day to day items that you own will be overlooked as a matter of course.
However, if a kitchen item is considered to be a luxury item of considerable value, your Trustee may ask you about it. If they feel that selling the item would be of benefit in freeing you from your debts, they may ask you to sell it and downgrade to a cheaper version of the item, taking any difference for your creditors.
Your Trustee may also be lenient when assets relate to your continuing work. If you’re self-employed, you may have a tools or equipment that you find essential to your business.
It is in the interest of all of your creditors that you continue to trade as it gives them the best chance of getting some of their money back. A Bankruptcy Trustee will take this into account. If you can make a persuasive case that specific items are essential for your work, you may be allowed to keep them. Items could include tools, IT equipment and even a business vehicle.
As before, it is for your Trustee to decide what constitutes essential assets and, if any equipment or vehicle can be downgraded for profit, they may request you to do so.
When you enter bankruptcy for the first time, it’s important not to panic. It may seem like you’re in for 12 months of pain but remember this: your Official Receiver and your Trustee aren’t there to punish you, they’re there to help.
In fact, your Trustee has exactly the same aim as you do: to get you out of debt. The more you help them and the closer you work together, the faster they can sort things out. What’s more, Receivers and Trustees want to see you thrive throughout the process. If putting you through bankruptcy puts a further strain on your finances and on your life, there’s less chance of them satisfying your creditors and delivering you to a happy, debt free future.
In short, they’re there to look after you.
Now it might not seem like they’re on your side some of the time. They’re going to ask a lot of questions and they’re going to be looking at selling off some of your assets. That comes with the territory, I’m afraid. The one thing they’re not going to be is unreasonable.
For example, if you have a car that you need for work, they’ll take your work needs into account. If you absolutely must have your vehicle to get about, they’re fine with that: just talk to them.
Also, if you’ve got a partner and/or a family and you can’t bear to leave your house, your Trustee may be able to provide a solution. If it’s possible, they might offer your partner the chance to buy your share of the Equity in the house. Not only will this provide them with a solid amount of cash to share with your creditors, it’ll also allow you to stay in your home. It’s also far less paperwork for them.
If your partner can’t find the funds to buy your equity, or you live alone, the one thing that your Trustee just won’t do is simply kick you out without warning. If the sale of your house is unavoidable, your Trustee will allow you to stay in the house until other arrangements can be made. If you’ve not got much equity in the house, they may not decide to sell the house straight away anyway.
It’s important to keep talking to your Trustee to find out what they’re up to and what they’re planning to do next. If you’re worried about something, they might just have a solution.
Shared Homes and Bankruptcy
If you’re in a relationship, married or recently divorced, Bankruptcy can throw up some real challenges. The biggest of problem most couples come across is the thorny issue of shared property.
If you worry about losing the family home when your partner or ex is declared bankrupt there are some things that you need to know.
It is important to note that any property that your partner or ex-partner part-owns could be considered as a saleable asset – it isn’t a forgone conclusion but there’s no getting away from this. It’s also important to remember that this is only part of the story.
Bankruptcy for your “other half” doesn’t necessarily mean that you’ll have to move out of the home you share. As a part-owner of the property, you have options.
First of all, it is important to work out what proportion of the equity of the house is in your name and what proportion is your partner’s. Remember: if your partner is the one going bankrupt, the Trustee is only interested in the equity they own. If you can demonstrate that most of the equity belongs to you, or that you’ve been keeping up the lion’s share of repayments, this will limit or reduce what the Trustee is looking for. This could make all the difference, especially if you’ve been separated from your partner for some time.
If the ownership of the house is split fairly evenly, there may another option. If you can afford to do so, the Trustee may allow you to buy any equity that your partner, or ex-partner, still holds in the house. Effectively, the house will transfer to your name and your sole ownership.
Buying equity from your partner is a win-win situation. The Trustee gets a tidy sum to pay towards your partners’ debts and you get to stay in the house. As such, it’s often the first the suggestion that the Trustee will make. If you can afford it, it may just save your home.