What is bankruptcy?
Bankruptcy is a legal process that individuals or businesses can use to manage or eliminate their debts if they are unable to pay them. The process is overseen by the Insolvency Service, an executive agency of the UK government.
The purpose of Bankruptcy is to provide protection to the bankrupt against claims from creditors in respect of debts and liabilities and to realise and distribute the property owned by the bankrupt among creditors. Whilst bankruptcy is seen to offer a fresh start, it comes with significant consequences and legal restrictions.
How does the bankruptcy process start?
There are two ways the bankruptcy process can commence
- Where a creditor (who is owed £5,000.00 or more) wishes to seek a bankruptcy order against an individual, a prescribed process must be followed leading to petitioning the court for a bankruptcy order. The content of the petition will depend on the grounds on which it is based.
- Where a debtor wishes to be made bankrupt, they may make a bankruptcy application which is determined by an adjudicator, and not by the court.
Following which, a trustee in bankruptcy will be appointed in order to realise the bankrupt’s assets, distribute them to creditors, and to investigate whether any transactions entered into by the bankrupt are able to be challenged.
What is the effect of bankruptcy?
Immediately following a bankruptcy order, the order will be publicly listed on the Individual Insolvency Register, unsecured creditors must stop contacting the bankrupt and must stop taking legal action for recovery of the debt. Ownership of certain assets will pass into the name of the trustee in bankruptcy. The bankruptcy will stay on the bankrupt’s credit file for 6 years which is likely to impact any ability to borrow money.
A bankrupt cannot act as a director of a company without court permission and work in certain professions may be affected.
How long will the bankruptcy last?
The length of time can depend on how cooperative the bankrupt is in the process but typically a bankruptcy will last 12 months. After discharge from bankruptcy, the majority of debts are written off. Some debts do survive bankruptcy such as child maintenance, court fines and student loans.
How could Bankruptcy affect me as a Company Director?
If a limited company goes bankrupt, the directors of the company may be personally liable for the company's debts. This means that the creditors of the company can try to recover the money they are owed by pursuing the directors personally, even if the directors have no personal assets.
Additionally, being a director of a bankrupt company can have negative consequences for the director's personal credit rating and may make it difficult for the director to obtain credit or to be appointed as a director of another company in the future.
If a limited company director is concerned about the potential impact of bankruptcy on their personal finances, it is recommended that they seek legal advice as soon as possible.
The bankruptcy process in the UK can be complex and it is recommended that individuals seek legal advice before petitioning for bankruptcy. Contact our team today to discuss your situation.
Key Contact
Mark Davies
Partner | Head of Restructuring & Insolvency
Mark is the Head of the Restructuring & Insolvency team and advises Insolvency Practitioners on a national level in relation to insolvency cases. He also advises unsecured creditors in relation to their claims in insolvent estates.
