When All Else Fails...

Mike Thomas looks at the legislation surrounding bankruptcy

Individual insolvency figures released for the second quarter of 2007 indicate that 308 individuals either go bankrupt or propose an Individual Voluntary Arrangement, IVA every day in the UK.

Should we be concerned? Closer scrutiny of the data reveals that the number of self employed individuals that have gone bankrupt has remained unchanged while other categories have risen sharply, this indicates that the new legislation introduced in April 2004 is not helping entrepreneurs whose business ventures have gone wrong, as it was originally intended to do so. Instead it is being used by the average consumer, the likes of you and I, as a way of eradicating consumer debt problems.

Over the past decade this country's economy has been fuelled by 1.38 trillion pounds of consumer borrowing. Morally and socially we have been encouraged to spend and pay later through slick marketing and the easy availability of credit and from this we have developed a culture of must have now. In Victorian times you would go to prison for bad debts! What ever the reasons more and more people are going bankrupt or proposing Individual Voluntary Arrangements, ('IVA's) than before to deal with their burdening debt problems.

Under the new legislation those made bankrupt after April 2004, will generally be discharged after 1 year, less in some circumstances. In some instances it is proposed that discharge will be on the date the Official Receiver, ('OR'), files a report on the bankrupt into court and this could be a matter of weeks.

Assets will still form part of the bankrupt's estate and will, subject to certain exceptions already in place, be controlled by the OR or Trustee as necessary. The Act however changes the way the dwelling house is dealt with. This can be summarized as follows:

Trustee in bankruptcy has 3 years from the date of bankruptcy to deal with the bankrupt's interest in his/her sole or principal dwelling house or that of the bankrupt's spouse or former spouse's home. The trustee will apply for either an order of sale or possession, a charging order to cover the value of the interest, sell the home to realises the interest or reach an amicable agreement with the bankrupt regarding the interest.

Many bankrupts believe they are free from debt and restrictions after just one year; they appear to be misinformed because other key points are applicable. The first is Bankruptcy Restriction Order, BRO. This imposes restrictions on a bankrupt whose conduct has been negligent or reckless. Where applicable they will generally apply after the bankrupt has been discharged and can run for between 2 and 15 years.

Also new in 'The Act' is an Income Payment Agreement, ('IPA'). This is a legally binding written agreement between the bankrupt and the OR or Trustee that requires the bankrupt, or a third party, to make specified payments to his or her Trustee for a specified period. An IPA will detail the period for which it is to have effect and that the period can apply after the bankrupt has been discharged. The agreement will not extend more than 3 years after the date of the IPA.

Alternatively there is an Income Payment Order, IPO. Upon the application from the Trustee in bankruptcy the Court issues an order that the bankrupt makes a payment to the Trustee in contribution towards his or her debts. This order will usually last for 3 years, are generally not contested and can only be varied upon application to the Court by either the Trustee or bankrupt.

Some bankrupts are not even aware of their restrictions, I have highlighted the key points below;
• Cannot take on any further credit of £500 or more without informing the lender that they are bankrupt.
• Stop using their bank account and any credit cards etc immediately. The Official Receiver will guide the individual as to what type of account they may hold, usually a basic account.
• Cooperate with the Official Receiver. They may be asked to attend his/her office for interviewing, in some instances this can be done over the telephone.
• Notify the OR of any windfall or financial gain during the bankruptcy.
• The OR may also place other restrictions.

The cost to petition is regarded by many to be excessive. The fee is broken down as follows: £335 Official Receiver's fee and £150 Court fee, total £485. If the petitioner can demonstrate that they are on benefits then they may not be required to pay the Court fee. They will need to ask the Court for more details on this. Cost updated August 2007.

Insolvencies are expected to increase even further as the Government has recently finished a consultation on IVA's, Individual Voluntary Arrangements, with a view to pushing through legislation for Simplified IVA's, ('SIVA's) whereby it would make it cheaper and quicker for borrowers with debts up to £75,000. SIVA's are expected to be available to the consumer in April 2008. New Debt Relief Orders, DRO's are also expected to follow to help borrowers with lower levels of unsecured debt.

Further information on bankruptcy procedure, IVA's as well as an interview on BBC News about the insolvency figures released on Friday 3rd August can be found at www.debtwizard.com

In the preparation of this article, every effort has been made to offer the most current, correct and clearly expressed information possible. However, it is not intended to serve as legal advice and you are encouraged to consult with professional advisors for advice concerning specific matters before making any decision.