Alternatives to bankruptcy

Whilst bankruptcy can help individuals deal with the stress of personal financial problems by drawing a line in the sand and allowing individuals to start afresh, bankruptcy also has many adverse consequences and it is therefore necessary for individuals to consider what alternatives are available other than bankruptcy.

What are the adverse consequences of bankruptcy?

Once an individual is made bankrupt, a trustee in bankruptcy may be appointed to investigate their affairs in the period leading up to the making of the bankruptcy Order. If a bankrupt has disposed of any of their assets, such as the matrimonial home, or made payments to specific creditors (which are known as an antecedent transactions), the trustee in bankruptcy may issue claims against the parties to the transaction to recover the asset for the benefit of the creditors.

Further,

• a bankrupt’s assets will be sold and the proceeds distributed to the creditors of the bankruptcy estate. This includes a bankrupt’s matrimonial home, which is not safe from bankruptcy and may have to be sold.
• if a bankrupt owns a business, it is possible that it will be closed down or sold, which could result in the dismissal of a bankrupt’s employees.
• in addition, a bankrupt will be unable to keep a bankruptcy private. The bankrupt’s details will be listed in the insolvency register, which people can access on the internet and the making of the bankruptcy order could also be published in a local newspaper.

Once a Bankruptcy Order is made, an individual’s credit rating will be affected which will cause problems they hope to borrow money, apply for credit or obtain a mortgages.

Bankruptcy may also affect a bankrupt’s job. Until a bankrupt is discharged from their bankruptcy, they may not act as the director of a company or take part in its promotion, formation or management unless they apply to the court for permission to do so. In addition, they may not act as an insolvency practitioner, or as the receiver or manager of the property of a company on behalf of debenture holders and cannot be a MP in England or Wales.

Further, some professional institutions may dismiss a bankrupt from their professional membership potentially destroying their careers. Institutions such as the Law Society, the Institute of Legal Executives, the Institute of Chartered Accountants, Local Authorities, National Association of Estate Agents may treat bankruptcy as a mandatory dismissal. Others such as The Royal Navy, Royal Airforce, Royal Army, Metropolitan Police, Royal Pharmaceutical Society, Royal College of Veterinary Surgeons and the Royal Institute of Chartered Surveyors have a policy of discretionary dismissal for bankrupt members.

What are the alternative options?

A Debt Relief Order (“DRO”)

DROs have been available since 6 April 2009 and provide debt relief to individuals, subject to some restrictions.

They are normally only suitable for individuals who:

• Do not own their own home;
• Have little surplus income and assets; and
• Have less than £15,000 of debt.

All unsecured debts included in the DRO will be written off after 12 months and individuals will repay only what they can afford

DROs do not involve the courts. They are run by The Insolvency Service in partnership with skilled debt advisers, called approved intermediaries, who will help you apply to the Insolvency Service for a DRO.

How long do DRO’s last?

DRO’s last for 12 months and during that period an individual’s creditors named on the DRO cannot take any action to recover their money without obtaining permission from the court first.

At the end of the 12 month period, if an individual’s circumstances have not changed they will be freed from the debts that were included in the DRO.

Is a DRO likely to be suitable for me?

To apply for a DRO, an individual must meet certain conditions:

• They must be unable to pay their debts.
• The must have debts of less than £15,000.
• They can own a car to the value of £1000 but the total value of their other assets must not exceed £300.
• After taking away tax, national insurance contributions and normal household expenses, their disposable income must be no more than £50 a month.
• They must be domiciled (living) in England or Wales, or at some time in the last 3 years have been living or carrying on business in England or Wales.
• They must not have been subject to another DRO within the last 6 years.
• They must not be involved in any of the another formal insolvency procedure at the time that they apply for a BDO which are listed below:

1. A bankruptcy order;
2. An individual voluntary arrangement;
3. A bankruptcy restrictions order or Undertaking;
4. A debt relief restrictions order or Undertaking;
5. An interim order;
6. Where an individual is currently petitioning for a bankruptcy order if the court has not referred them to the DRO procedure as a more suitable method of debt relief; and
7. Where a creditor is currently petitioning for a bankruptcy order, and the creditor’s permission has not been obtained before applying for a DRO.

Individual Voluntary Arrangement or “IVA”

An Individual Voluntary Arrangement is an agreement that an individual can enter into with their creditors to pay off their debts over a set period of time which is usually 3 to 5 years.

The Individual Voluntary Arrangement proposal has to be to approved by an individual’s creditors and once it is approved, it will be legally binding and all interest and charges will be frozen and creditors will be prohibited from demanding additional payments.

The IVA will be supervised by an Insolvency Practitioner who will collect the IVA payments and will ensure that the payments are distributed to all creditors on a pro-rata basis until the successful completion of the IVA. Upon the successful completion of the IVA an individual will be considered debt free.

During the period of an IVA and individual’s financial situation will be reviewed annually to see if there has been any change in their financial circumstances.

Why might an IVA be preferable to bankruptcy?

An IVA may be preferable to bankruptcy if an individual:

• May lose their job if they were to be made bankrupt
• Has some spare income each month or a lump sum to offer to make repayments to creditors
• Owns a home or other assets that they do not want to lose
• Owns their own business or is a director or involved with the promotion, formation or management of a company for permission to do so.

An IVA is often more flexible than bankruptcy because it can be set up to fit around an individual’s personal circumstances.

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We can assist individuals who have been made bankrupt or are facing a Bankruptcy Order and wish to have an alternative to bankruptcy.

Should you require any assistance please contact us.