Bankruptcy is one way for an individual to deal with overwhelming debt, which cannot be paid off in the usual way, as it falls due. Bankruptcy is publicly advertised and there is still some social stigma attached to it, albeit less than there once was. Nevertheless, bankruptcy is a useful legal tool for dealing with debt, in extreme cases, to which the fact that the number of personal insolvencies in England and Wales rose by 28% in the third quarter of the year compared with the same period in 2008 bears testament. Bankruptcy proceedings are designed to allow you to make a fresh start financially, subject to certain restrictions, but also to make sure that your assets, possibly including any equity in your home, are distributed fairly amongst your creditors. If you are declared bankrupt for the first time, you will usually be "discharged" 12 months after the date of the bankruptcy order, although the discharge period may be shorter in certain cases.
Bankruptcy
You can declare yourself bankrupt by completing a form, known as a "debtor's petition", which can be obtained from a county court with bankruptcy jurisdiction or the Insolvency Service and presenting it to the court. A fee of £150 is usually payable subject to certain conditions, as is a deposit of £360 for the work of the Official Receiver.
Once your bankruptcy is official, the Office Receiver or a trustee appointed on his behalf, can sell your assets – minus certain items, such as a motor vehicle or tools required to earn a livelihood, or essential household items – in order to raise money to pay your creditors. He can also look at your income and expenditure and decide how much you can afford to pay your creditors, if anything, after essential outgoings such a mortgage or rent payments, utility bills, etc. are taken into account. He may also ask you to sign an agreement known as an IPA or "Income Payments Agreement"; this is a legally binding agreement between you and the Receiver or his trustee, that you will make a contribution to your creditors for a period not exceeding 3 years. The amount that you will usually be asked to pay is between 50% and 70% of your disposable income, if you have any, after your income and outgoings have been reviewed by the Receiver. If you refuse to sign the agreement, or you fail to keep up repayments as agreed, you can be issued with an IPO or "Income Payments Order", in any case; this is an order from the court that forces you to pay back the money you owe or suffer the legal consequences.
Bankruptcy may free you from the immediate pressure of overwhelming debt, but it certainly does not free you from responsibility. You must of course, immediately cease using your bank or building society accounts, credit cards, etc., but it is still your responsibility to continue paying your rent, mortgage, utility bills and to service any debt you incurred after you were declared bankrupt. Over and above that, you must supply the Official Receiver on request, with a list of your assets, together with a list of your creditors and the debt you owe to each of them and eventually all of your assets, including paperwork – bank statements, deeds, insurance policies, etc. – relating to any property you own and all of your financial affairs. You must also disclose any changes to your financial circumstances after you become bankrupt; you may for example, inherit property or money from a will or receive a lump sum from an investment, or as a redundancy payment, etc.. You are also forbidden from making payments directly to your creditors and you cannot obtain credit of over £500 from any source without disclosing that you are an undischarged bankrupt.
The other way that you can be made bankrupt of course, is if one or more of your creditors presents a "creditor's petition" to the court. Creditors are legally entitled to do this if you owe them £750 or more in unsecured debt. It is unlikely that any creditor would attempt to have you declared bankrupt over such a trifling amount, but bankruptcy proceedings can proceed against you whether or not you recognise them and even if you dispute any claim. You should seek impartial advice from a charitable or commercial debt organisation – Citizens' Advice Bureau, Consumer Credit Counselling Service and National Debtline provide advice and support free of charge – a licensed Insolvency Practitioner or a similar professional, such as a solicitor or qualified accountant, as soon as you are aware of bankruptcy proceedings against you.