Bankruptcy and Insolvency

Bankruptcy is brought about when an individual or commercial organisation is no longer able to pay their debts.

There are two distinct types of bankruptcy, personal bankruptcy and commercial bankruptcy. Personal bankruptcy is the bankruptcy of an individual, whilst commercial bankruptcy is the bankruptcy of a company or commercial organisation.

The purpose of bankruptcy is to convert the assets, personal or business, into a lump sum for distribution between the creditors.

Either a debtor or creditor may apply for a Bankruptcy Order. The debt must be at least £750 and not be disputed by either party. On the making of the Bankruptcy Order, all the debtors’ financial assets pass to the Official Receiver, and the Debtor is subject to a number of financial restrictions.

New Bankruptcy Rules are now in force which can enable people with severe debt problems to become debt free much quicker then previously. Bankruptcy may now be a better solution than debt management, or an Individual Voluntary Arrangement. The new rules allow a person who cooperates fully with the Receiver to be discharged from bankruptcy and become debt free in less than one year.

However, the principle of 'can pay, will pay' still applies. A bankrupt will still:

• risk losing their home and possessions, which will be sold to pay outstanding debts;
• face severe restrictions on their finances, such as getting a mortgage, bank account or future credit;
• have their bankruptcy advertised and recorded on a public register that anyone can search;
• make ongoing payments to creditors where possible;
• face prosecution if they are found to be dishonest.

Individual Voluntary Arrangement [IVA’s].

An IVA is a formal legally binding agreement between an individual who is unable to pay his creditors and a licensed Insolvency Practitioner. The Insolvency Practitioner will put together a form of proposals to the Creditors for approval and administer the IVA.

Normally the debt must be over £25,000. On agreement the creditors accept a reduced offer of repayment in full and final settlement of the debt. Payments are normally made over a 5 year period, following which the remainder of the debt is written off. All interest and charges on accounts are frozen.

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