Bankruptcy Order definition
What is a bankruptcy order?
Bankruptcy is a way for individuals to deal with debts they can’t pay. It is essentially a form of insolvency that declares that you are unable to pay off existing unsecured debts. Whilst bankruptcy is a commonly used term in the UK, it should only be used to refer to individuals. Technically speaking, individuals go bankrupt, companies become insolvent. Therefore, when referring to sole traders and partnerships, the owner can go bankrupt and the business will no longer trade.
Bankruptcy can be declared voluntarily by yourself or involuntarily by a creditor; for a creditor to make you bankrupt you must owe at least £5,000. Once you’ve declared yourself - or been declared - bankrupt, you will no longer have to interact with creditors. They can no longer take further court action against you and overwhelm you with threatening letters and phone calls. Instead, this responsibility, and the responsibility of your money and assets, will be taken over by a trustee. They will either be an official receiver (a bankruptcy court-appointed officer) or an insolvency practitioner (a debt specialist, often a lawyer or accountant).
The bankruptcy process shares your assets among the creditors you owe money to and, with some restrictions, allows you to make a fresh start, free from debt.
Don’t forget that bankruptcy might not be your only option and it might not be the best one either - if you have a choice. You could apply for a debt relief order if you have debts, income and property below a certain amount, which works out as a cheaper alternative to bankruptcy.
Annulment of Bankruptcy Order
You can apply for your bankruptcy order to be cancelled - also known as annulled - if the bankruptcy order shouldn’t have been issued, all your debts and bankruptcy fees have been paid or guaranteed by a third party, or you’ve made an IVA with your creditors to pay all or part of your debts. An IVA is a binding agreement with your creditors to pay all or part of what you owe. As an alternative to becoming bankrupt, you can enter an IVA before the bankruptcy order is made or propose an IVA after the order has been made.
In order to annul your bankruptcy, you need to: make an application to the court under the insolvency rules, include all necessary details on the application, pay a fee of £155 to the court and provide a witness statement explaining the reasoning behind the application. The court will assign a date for the hearing. It is imperative to attend.
You should also send copies of the application and witness statement - with the hearing date - to the person who applied for your bankruptcy (if you are annulling your bankruptcy because the order shouldn’t have been made), the official receiver and the trustee (if different).
Discharge of Bankruptcy Order
You will be freed from bankruptcy - or ‘discharged’ - after 12 months. This ceases any bankruptcy restrictions and releases you from the majority of debts you had when the bankruptcy order was made. In normal circumstances you will be discharged automatically, even if no payments have been made to your creditors, you’re still paying an Income Payment Agreement (IPA) or Income Payment Order (IPO) and some assets haven’t been sold yet. Assets you had during bankruptcy can still be used to pay off debts once you have been discharged.
A bankruptcy order can be extended for longer than a year if you don’t cooperate with the appointed trustee. You can check your discharge date using the Individual Insolvency Register on the gov.uk website.
What happens to your debts?
The debts that you won’t be freed from once your bankruptcy has ended are debts gained by fraud, money owed under family proceedings, damages payable to anyone for personal injuries, student loans, court fines and debts created after the bankruptcy order. All other debts are ones you will not need to pay back.
What happens to your assets after discharge?
Assets that are part of the bankruptcy order stay under the trustee’s control when the bankruptcy finishes. It can take time for assets to be dealt with. You also need to carry on making payments agreed under an IPO or IPA.
If your family home has not been dealt with three years after the bankruptcy order was issued, the interest may be returned to you. If this happens, the Land Registry will be informed that the property is not part of the bankruptcy estate anymore. The trustee will send notice to the Land Registry and the restrictions will be removed.
The restrictions on your business will end when you have been discharged of bankruptcy, unless the official receiver believes you to have been dishonest, in which case they can apply to extend the restrictions.
Advantages of Bankruptcy
- You can make a fresh start when the bankruptcy order ends.
- Some pressure is alleviated as you no longer have to deal with creditors.
- The money you owe can sometimes be written off.
- You can keep certain things to live on, like household goods.
- Creditors have to stop most forms of court action following a bankruptcy order.
Disadvantages of Bankruptcy
- If your income is above a certain level, you will have to make payments towards your debts for three years.
- Bankruptcy will be published publicly unless this may threaten you or your family’s safety.
- Bankruptcy involves going to court and this process usually costs £680 - higher if you use a solicitor, which can be advantageous, yet not essential.
- Bankruptcy can affect your immigration status.
- Some professions prohibit people who have faced bankruptcy from carrying on working.
- It is harder to take out credit when you’re bankrupt and your credit rating will be affected for six years.
- If you own your own property, you may have to sell it.
- Some of your possessions may have to be sold, such as your car and any luxurious, expensive items.
- If you are, or are almost, the right age to receive your pension savings, these may be taken.
- If you own a business, it may be shut down and the assets sold.