What are the implications of Bankruptcy?
Bankruptcy has serious implications for your future financial situation. Bankruptcy is a last resort; it should be considered only when all other options have failed. As such, individuals who are declared bankrupt should be prepared to lose control of their assets.
Your assets will be assessed, and your Creditors will try to recover as much of their money as possible. This means that you may lose assets, you may lose some of your income, and your ability to get credit will be severely curtailed.
Will they take everything?
Some of your possessions might have to be sold, for example, you will sometimes lose your car and any luxury items you own. If you own a business, the official receiver may sell off some of the business assets.
What happens to your pension?
The law on bankruptcy and pensions changed in 2000. If the petition for your bankruptcy was made on or after 29 May 2000, your pension will not be treated as an asset for bankruptcy purposes – provided that it is a scheme approved by HMRC. In practice this means that your pension cannot be taken to pay off your debts. The trustee may, however, be able to take any benefits received from your pension before your bankruptcy is discharged.
When do you Become a Discharged Bankrupt?
Most people are discharged from their bankruptcy automatically on the first anniversary of the Declaration of their Bankruptcy. From this point you are entitled to a certificate of discharge, which (for a small administration fee) can be obtained from the court at which you were declared bankrupt.
You should be aware, however, that a discharge after 12 months is not guaranteed and may not take place if your discharge period has been suspended. Suspension usually happens if you have failed to fully co-operate with the Official Receiver put in charge of managing your case.
If the Official Receiver can demonstrate that you have not complied with the obligations set out in your bankruptcy order then they have the power to have your discharge suspended, either for a set time period or indefinitely.
Furthermore, if you have a bankruptcy suspension order put in place, then the Restrictions of Bankruptcy will still apply, even after being discharged.
Can you be Discharged from Bankruptcy Early?
It is possible to be discharged before the standard 12-month period, if your Official Receiver applies to the court that their investigation into your affairs has been concluded or is considered no longer necessary. Any existing creditors or trustees must be given the opportunity to raise an objection, but if none are raised the order for the early discharge may be granted.
Does bankruptcy cover all my debts?
After your bankruptcy is discharged, you will be freed from most of your debts. There are, however, some exceptions to this. These include:
It does not cover student loans
It does not cover child Support Agency payments
It does not cover any debts that you took on after the date of the bankruptcy order
It does not cover any debts that you incurred as a result of fraud.
Will everyone know im bankrupt?
It is possible for most of the world to know with today’s technology. Bankruptcies are advertised in the national and local press along with certain dedicated websites. Anybody can search the Internet and find a list of bankruptcy listings within seconds. If you are made bankrupt then your name will be there. Unfortunately, if you want to stay quiet about your money problems then bankruptcy is not the option to choose.
This may seem to be a depressing state of affairs, and to be fair, it is. However, if you are finding it more and more difficult to meet your monthly commitments then there may be a time that you could face bankruptcy. Facing your debts before you reach that level of intervention is always advisable. There are a number of viable options that you can look at before finally deciding to opt for bankruptcy, such as:
Debt Management Plan
How will my credit rating be affected after discharge from bankruptcy?
Your ability to secure credit will be severely impaired by bankruptcy. Many lenders will simply not extend credit to those who are bankrupt or recently discharged.
A bankruptcy will have a lasting impact on your credit rating. Although the bankruptcy itself may last for only 12 months, a record will stay on your credit file for as long as six years. This can make it very difficult to secure credit even after your bankruptcy has been discharged.
In certain instances, though, you may be required to inform a potential lender of your bankruptcy – even after it has disappeared from your credit file. This is particularly common when applying for a large loan or a mortgage. If you are subject to bankruptcy restrictions these can also appear on your credit file for longer periods.
The impacts of bankruptcy are significant and far-reaching. It is vitally important that you seek independent advice before petitioning for bankruptcy, or if a creditor petitions for your bankruptcy.
Who will manage my bankruptcy?
Your bankruptcy will be managed by a Trustee. If your affairs are relatively simple, the Official Receiver will probably take on the role of Trustee. If your affairs are more complex, however, the Official Receiver may instead ask for a private sector Insolvency Practitioner to be appointed.
What about meeting the official reciever?
The Official Receiver is one of the most important parties in bankruptcy proceedings. Often known as the OR, this individual is a court officer who will take responsibility for administrating the bankruptcy once an order has been given by the court.
You will be contacted by the Official Receiver if an insolvency order is issued. Depending on the nature of your financial affairs, you may be required to visit their office for an interview.
When will I have to visit?
Generally speaking, the Official Receiver will ask you to attend an interview if they determine that they need information to help them take urgent action in relation to your affairs. They will contact you immediately if this is the case, and an appointment will be made within 10 days. If you do not need to appear, you will be sent a letter informing you of this.
What happens during my meeting?
If you are required to appear for an interview, you should phone the Official Receiver’s office to confirm that you are available on the given date. On arrival a member of staff will ask to check through a questionnaire, which will have been sent to you with notification of your appointment. You should have completed this in advance; if you have not done so, you will be asked to complete it there.
An examiner will then ask you some questions regarding your current financial situation. They will want to know:
How much you owe and who you owe it to
The reasons for your debt, and the events that led to bankruptcy
About your assets, including your property, any shares or insurance policies you might have, your pension and so on
How much you earn and how much your spend
You should answer their questions fully.
After your interview you will be asked to provide the Official Receiver with documents relating to your finances – they will include household bills, bank statements, salary slips and anything else relevant to the bankruptcy. They will retain these documents for examination. If you fail to provide these documents, or if you do not provide sufficient information during your interview, you will be asked to appear again.
What happens afterwards?
Following your interview your documentation will be checked, and the Official Receiver will report back to the Creditors. If you have any material assets (for example a house), an Insolvency Practitioner will be appointed to deal with their disposal. The report will be provided to creditors within 12 weeks. If a meeting of creditors is required (normally only if you have assets to be sold), this will happen within four months – although it normally takes place within 12 weeks.
It is worth remembering that the entire process will be much quicker if you cooperate fully with the Official Receiver and their staff. Failure to do so will result in more meetings and more paperwork. If you refuse to cooperate altogether you may be summoned to court. Your bankruptcy may also remain Undischarged for longer.
The Official Receiver has a vital part to play in any bankruptcy proceedings. It is vital that you cooperate with them, and that you provide them with all the information they need.
How can I protect an inheritance?
To begin with, it is vital that you do not try to hide an inheritance from the trustees or Official Receiver. If you do this you will be breaking the law, and there are significant repercussions. Do not kid yourself into thinking that an inheritance will go unnoticed; the Official Receiver will find it eventually.
That said, there are ways in which you can legitimately protect an inheritance. If you intend to petition for bankruptcy, you should consider asking the testator to use their will to establish a discretionary trust. In this arrangement, your portion of the inheritance will enter into trust upon the death of the testator. The trustees will have control over the assets that are placed in trust, and they will be able to give those assets to you once your bankruptcy has been discharged.
The trustees have a significant degree of power in this arrangement. It is therefore important that the appointed trustees are trustworthy. They might be family members or a professional organisation.
Trusts can be complicated, and you should remember that they could be subject to challenge in a bankruptcy situation. It is therefore important that you and the testator seek professional advice before taking any action.
What happens if I inherit while bankrupt?
If you become entitled to an inheritance while you are still an Undischarged Bankrupt, it is likely that the trustees or Official Receiver will use the money you inherit to pay your creditors. That is to say, you will probably lose the inheritance.
There are a few things to remember here. First of all, the key consideration is when you become entitled to the money. This is normally judged to be the time at which the testator (that is, the individual who wrote the will) dies, rather than the date on which the money arrives in your bank account. This can be problematic for individuals approaching the end of bankruptcy.
Furthermore, if you are a beneficiary of a will before you are declared bankrupt, the inheritance is likely to be treated as an asset under your ownership. Again, this means that you are likely to lose the money.
What is a statement of affairs?
A statement of affairs is a sworn document revealing how much you owe to each creditor, how much money you have coming in and a comprehensive list of your disposable assets; such as your home and car. Allowances are made for food, utilities and other necessary expenses, but you will not be allowed to claim for unnecessary luxuries. The Statement of Affairs also details how you got into so much debt originally, such as losing your job or suffering a spousal bereavement, as this helps the court to decide if it was deliberate on your part. The answers in this section could have a bearing on how lenient the court is with you. The Statement of Affairs is a very detailed document and you may need help from an official source to fill it in correctly. The next twelve months will be hard, but there will be an end to your problems if you adhere to the order and are truthful. Remember, the Trustee will look carefully into all your claims, dishonesty now could cost you more.
How does a Trustee operate?
The Trustee will try, amongst other things, to make sure that your creditors receive at least some money. There are three main ways in which this might be achieved. First, the Trustee may sell your assets and use the money to pay your creditors.
Second, the Trustee might ask you to enter into an Income Payments Agreement (IPA). This is a voluntary arrangement in which regular payments are made to your creditors from your ‘surplus income’ – that is, the money that is left over from your income after you have met your basic living costs.
Finally, if you cannot agree with your Trustee on an IPA, the Trustee may apply to the court for an Income Payments Order (IPO). This means that money can be taken directly from your pay packet and given to your creditors. Again, these payments will only be taken from your surplus income. Remember, the trustee acts for the Creditor, not you.
What are the differences between bankruptcy and an IVA?
Bankruptcy and an individual voluntary arrangement (IVA) are both forms of insolvency.
They are both legal processes and if listed on a credit file look pretty much the same.
So you now know two things they have in common; what are the other similarities, and, more importantly, what are the differences?
An IVA can last five to six years but in somes cases the individual with financial assistance from family or friends can make a once off payment (agreed by creditors) in a full and final settlement. This helps the individual to avoid the longer process of monthly payments over years. In bankruptcy you would normally be discharged after 12 months, although you could be expected to pay into the bankruptcy for three years (or, in rare cases, possibly more).
In an IVA you would need a healthy surplus income (usually £150+) that you would be expected to pay into the arrangement for the benefit of creditors. To go bankrupt you don’t need to have any surplus income but you would usually need to show a balanced budget.
Both bankruptcy and IVAs have charges or costs associated with them. In an IVA a percentage (agreed by creditors) of the monthly amount that you pay into the arrangement (once approved) will go to towards the Nominee and Supervisory fees associated with the IVA. In bankruptcy you’re expected to pay an upfront fee to the courts to pay for the petitioning costs (part of this may be waived if you are in receipt of certain benefits).
In an IVA you work with a licensed Insolvency Practitioner. The insolvency practitioner would first act as Nominee and then, once your IVA is approved, as Supervisor of the arrangement. The fees from this are taken from the amounts paid into the arrangement at the agreement of creditors.
All IVAs are unique to the circumstances of the individual(s) involved but they are often recommended when the people concerned own a property or have assets they wish to protect. There is a common misconception that if you go bankrupt that you will lose any property you own. If the property you own is in negative equity you may find that you’ll be allowed to retain this.
Both bankruptcy and IVAs are listed on the publically-searchable insolvency register.
Both will be on your credit file for six years.
In bankruptcy you might have your accounts frozen for a period of time; in an IVA you may need to open another basic bank account with an unconnected creditor.
Once you have petitioned for your bankruptcy you will be in the hands of the Official Receiver – there’s no going back from there. They’ll have full access to all bank accounts and any financial transactions.
In an IVA, if you have a change of circumstances and you can no longer pay anything into it, you could find that the IVA breaches and fails. You may then be left with little alternative but to petition for bankruptcy in order to resolve your problem debt.
If you’re trying to decide between an IVA and bankruptcy it might come down to what is the quickest and cheapest solution. If you have no assets and a small amount of surplus income (typically £100 or less) you might be better off financially by choosing bankruptcy. It’s worth noting than in bankruptcy your creditors will rarely see a return on the amounts you have borrowed.
If you have a larger surplus or some assets you wish to protect you might want to consider an IVA. Creditors will see a reasonable ‘pence in the pound’ return either over a period of years or by a full and final settlement and you’ll retain a degree of control about what you are proposing to your creditors. Of course, it still has to be agreed by the creditors themselves.
What are the drawbacks of an IVA?
IVA drawbacks are few when compared to the advantages that an IVA can offer but, nevertheless, it’s a good idea to investigate the IVA drawbacks at an early stage of the decision process, in plenty of time to understand how the IVA drawbacks may influence your decision to enter an IVA.
Every IVA is unique and the circumstances surrounding your IVA will be different from any other. It’s fair to say, therefore, that the IVA drawbacks surrounding your IVA will differ from every other IVA case too. Rather than trying to guess your circumstances, we’ve opted to detail the 5 IVA drawbacks that most people would recognise as having some bearing on their IVA. IVA drawbacks
These are the 5 drawbacks relevant to the majority of IVAs:
Longer repayment term than Bankruptcy (except where family or friends assist and a full and final settlement is agreed).
IVAs are usually set at a 5 year repayment term. Compared to bankruptcy, the IVA will last 2 years longer than a bankruptcy Income Payment Agreement (IPA). This can equate to a significant amount of extra repayments, which would not be payable in bankruptcy, so The IVA will not only run for a longer time period, but will cost more in repayments too when compared to bankruptcy.
Damage to your credit rating :
An IVA will impact on your credit rating and will be recorded on your credit file for 6 years. This isn’t such a big deal whilst you are in the IVA, because you aren’t allowed to borrow money during the IVA anyway, but the IVA will still be on your credit file for 1 year after the IVA has completed successfully and, therefore, obtaining credit for the first year after the IVA will be difficult if not impossible.
Not much flexibility :
The IVA is quite a rigid repayment plan and, once the IVA repayments have been agreed, you will not be able to simply adjust the repayments because you feel like it. Failure to maintain your payments could cause your Insolvency Practitioner to fail the IVA, which could result in bankruptcy proceedings being taken against you. Something which is better avoided if possible. That said, your Insolvency Practitioner has the ability to give a 6 month payment break when necessary and can reduce the IVA payment by up to 15% under the new IVA protocol.
Annual reviews :
The IVA is a supervised agreement. Your personal finances will be monitored during annual reviews of your IVA. During the annual review the IVA supervisor will expect to be given access to bank statements, income details and any other paperwork needed to enable them to assess your ability to make your IVA repayments. If they conclude you can afford an increase in your payments, your payments will rise.
Luxury assets at risk :
IVAs are good at protecting your largest asset such as your house and home, but if you own other sizable assets such as a motor home, a caravan, a foreign holiday home, a time-share apartment or even an expensive vehicle, they could be at risk should your creditors demand for them to be sold off. If they do, the raised funds would need to be introduced into the IVA as part of the arrangement.
As you can see, these different IVA drawbacks are definitely important enough to warrant you being made aware of, if for no other reason than so you can prepare yourself for the possible sacrifices that you may need to make.
About This FAQ
These answers are for guideline purposes only and answers specific to your case will be provided during your consultation with a specialist advisor from Aj Debt Solutions Ireland
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