Bankruptcy is often considered by a debtor to be an option of last resort and as an escape from their current debt situation. However, bankruptcy is a course that should not be considered lightly or entered into in haste. There are situations when bankruptcy is the right course for a debtor to take. However, by the same token there are situations when bankruptcy would not only be inappropriate but could represent a monumental mistake on the part of the debtor.

The constraints placed upon a bankrupt make bankruptcy a viable option only in the most extreme of circumstances. It is more likely for an IVA to be the solution to severe debt problems, since an IVA provides similar relief to that offered by bankruptcy but without the severe constraints which bankruptcy imposes. Consequently, a debtor needs to consider his/her financial circumstances fully to ensure the suitability of bankruptcy, taking full account of the effect bankrupt will have on the debtor’s current and future finances.

Bankruptcy - Matters to Consider

Current Assets

On the making of a Bankruptcy Order control and “ownership” of a debtor’s assets including property, shares and investments (etc) passes to the debtor’s Trustee in Bankruptcy. The debtor’s assets, subject to any third party interest in them, can be sold by the Trustee in Bankruptcy for the benefit of the debtor’s creditors. Accordingly, in circumstances where a debtor has little or no assets of real value, bankruptcy can be an appropriate or attractive solution. Any property jointly owned by the debtor may be sold by the Trustee in Bankruptcy to realise the value of the debtor's share in that asset. However the debtor’s primary residence (if it is a family home) cannot be sold for a period of at least 12 months after the making of a Bankruptcy Order.

Importantly, it must be noted that the Trustee in Bankruptcy can undertake investigations into the making of any gifts or sales at an undervalued made by the debtor in the five years before the making of the Bankruptcy Order. If such transactions were made when the debtor was insolvent, the Trustee in Bankruptcy can take steps to recover from the recipient the value of the gift or the undervalued part of the property transferred.

Future Assets

During the term of the bankruptcy (usually 12 months unless a Bankruptcy Restriction Order is imposed e.g. in circumstances of habitual bankruptcy, fraud or deception leading to bankruptcy) a debtor may expect to receive an inheritance or if there are existing assets (i.e. the debtor’s home, shares, or car if not subject to Hire Purchase) that may increase in value. Careful thought needs to be given to any potential increase in value of such assets or the receipt of an inheritance. It may be possible to avoid any difficulties arising by making appropriate arrangements within Wills and/or Trusts. However it should be noted that assets cannot be transferred by way of gift or undervalue into the names of third parties with the intention to put such assets out of the reach of the creditors.

Future Credit

When applying for credit of any kind amounting to more than £500 an un-discharged bankrupt is required to declare his status, and it is an offence to fail to do so. It follows that an un-discharged bankrupt continuing to operate a business on credit would be very difficult as many lenders would refuse to grant credit facilities.

Employment or Business

A Bankruptcy Order will prevent a debtor from holding certain offices, jobs and professions. As an un-discharged bankrupt a debtor cannot be a company director (or be concerned directly or indirectly in the management of a company, known as a shadow director), Member of Parliament, Local Government Councilor, Magistrate or Estate Agent. The rules of professional governing bodies for professions such as solicitors and accountants make it virtually impossible for a bankrupt to hold a practicing certificate for these professions. Additionally, security firms may refuse to employ an un-discharged bankrupt, particularly where money is involved.

An un-discharged bankrupt who operates his business as a sole trader can experience significant difficulties as a consequence of a Bankruptcy Order, and continuing to trade will be made more difficult by reason of the following:

• Where a business requires credit to operate (e.g. an bank overdraft), the requirement for the debtor to disclose that he/she is an un-discharged bankrupt will result in lenders refusing to grant credit;
• The reputation of the business in addition to that of its proprietor may well be damaged by the advertising of the Bankruptcy Order when it is made;
• The un-discharged bankrupt cannot trade under a name other than the one under which he/she was made bankrupt;
• The stock in trade of the un-discharged bankrupt’s business may be sold by the Trustee in Bankruptcy.

Housing

The effect of a Bankruptcy Order for a homeowner is two-fold. Firstly the homeowner will find it very difficult to obtain a re-mortgage, although there are specialist lenders who are prepared to consider applications from discharged bankrupts. Secondly, if the bankrupt owns his own property, and there is equity available, the Trustee in Bankruptcy would usually require that the property be sold, and the equity made available for the benefit of the bankrupt’s creditors. It should be noted that there is a restriction on the sale by the Trustee in Bankruptcy of a bankrupt’s primary residence where it is a family home. In those circumstances the Trustee in Bankruptcy cannot require a sale of the property within 12 months of the making of a Bankruptcy Order. This restriction does not apply to investment properties or second/holiday homes.

Landlords would be less likely to grant tenancies to tenants who are either un-discharged or discharged bankrupts. Alternatively, any Landlord prepared to grant a tenancy agreement may require a larger rent deposit to be lodged prior to the start of the tenancy.

Reputation and Stress

Bankruptcy proceedings and its consequence can be very stressful for the debtor. On the making of a Bankruptcy Order it will be published in a local newspaper inviting any creditor of the bankrupt to register their claim with the Official Receiver (as Interim Trustee in Bankruptcy). Additionally, following the making of a Bankruptcy Order the court may require the public examination of financial affairs and conduct of the debtor during the period leading up to the making of the Bankruptcy Order. This procedure is often undertaken in open court although mainly in circumstances where the debtor has failed to co-operate with the Official Receiver, or if a public examination is requested by at least 50% of the creditors by value.

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