The following are the different stages of bankruptcy:
Every bankruptcy starts with a bankruptcy petition presented either by a creditor or the debtor themselves. For a creditor’s petition, there has to be a sum of £750 or more owing to them from the debtor. If not, a joint petition of several creditors is necessary.
The amount owed has to be an unsecured, liquidated sum. In order to show that the debtor is unable to pay their debts, a creditor usually relies upon either the debtor's failure to comply with a statutory demand for payment or else upon their failure to honour a court's order to pay a debt.
At the hearing, the court will determine whether to make a bankruptcy order or not.
On the making of a bankruptcy order, the court will appoint an Official Receiver to take control of the debtor’s property.
The debtor has to submit a statement of affairs to the Official Receiver within 21 days of the making of a bankruptcy order. Based on the statement of affairs, the Official Receiver will decide whether it is necessary to call a meeting of creditors to enable them to appoint an insolvency practitioner of the creditors’ choice as the trustee in bankruptcy.
A creditors’ meeting will be held at the discretion of the Official Receiver or at the request of creditors who make up at least one quarter in value of the bankrupt’s creditors. A trustee in bankruptcy can be appointed at the creditors’ meeting.
All of the debtor’s personal property would be treated as vested in the trustee in bankruptcy on the date of the bankruptcy order. The debtor is only allowed to retain the basic essentials for their trade and living. Accordingly, valuable items may have to be sold and replaced with something more practical. Note: Under the Enterprise Act 2002 or the Insolvency (Northern Ireland) Order 2005 a limit of three years has been placed on the trustee’s rights to realise equity in a debtor's home (previously this right was open ended).
The trustee in bankruptcy will convert the debtor’s property into money, and use that money to pay the bankrupt’s debts (see the discussion below).
A first-time bankrupt can usually be discharged one year after a bankruptcy order is made (see the discussion below)
An unsecured creditor will not depend on the trustee in bankruptcy for repayment of the debts due to them. They can realise the asset over which they have security interest and keep the sales proceeds in discharge or reduction of the debts owed to them.
If the sale does not produce funds sufficient to cover the debt, the creditor can claim the balance as an unsecured creditor. If, on the contrary, the proceeds of sale exceed the sum owed to them, they have to pay over the excess to the trustee in bankruptcy for distribution among other creditors.
The money realised from sale of the bankrupt’s assets will be distributed in the following order:
The expenses incurred as a result of bankruptcy, including the professional charges of the trustee in bankruptcy.
There is a list of debts which are designated as ‘preferential debts’ to be paid in priority to other debts of the debtor. They include:
Pay as You Earn income tax and national insurance contributions due in the last twelve months before the bankruptcy order;
Certain debts can only be paid once all the ordinary unsecured creditors’ debts have been paid in full.
Up to the 31 March 2004 or 27 March 2006 in Northern Ireland every first-time bankrupt was discharged automatically either 2 or 3 years after the date of the bankruptcy order. Usually the period was 3 years, but if you petitioned for the bankruptcy and if your unsecured liabilities totalled less than £20,000, then the court might have issued a Certificate of Summary Administration; this would have cut the discharge period to 2 years.
For people made bankrupt on or after 1 April 2004 or 27 March 2006 in Northern Ireland, the Enterprise Act 2002 or the Insolvency (Northern Ireland) Order 2005 cuts the automatic discharge period to one year. There are also transitional provisions - if you have not received your discharge by 1 April 2004 or the 27 March 2006 in Northern Ireland and this is your first bankruptcy, you will be discharged automatically on the earlier of:
Any property acquired by the debtor after discharge of the bankruptcy order does not vest in the trustee in bankruptcy but belongs to the ex-bankrupt.