If you cannot pay your debts, are receiving telephone calls from debt collectors demanding payment or are dealing with a court action, bankruptcy may help you. One of the major aims of bankruptcy law is to give a financially distressed person an opportunity to make a new financial start. Declaring bankruptcy generally results in the “discharge,” or release from obligation, of your debts — or at least most of them — so that no further legal action can ever be taken against you on those debts.
In short, bankruptcy gives you a fresh start. However, careful consideration should be given before filing for bankruptcy, because doing so may affect your credit rating and have other adverse consequences (always seek independent legal advice).Personal Bankruptcy is the most common form of bankruptcy. Hence the term “Personal Bankruptcy,” because the debtor is relieved of personal liability for all debts (with certain exceptions). In return, a debtor must give up possession of the debtor’s assets (again, with certain exceptions).
Some debts are not discharged by a personal bankruptcy. The most common of these debts are child support, spousal support, criminal restitution and criminal fines. Other debts may or may not be discharged, depending on the particular circumstances. For instance, debts arising out of giving a false financial statement, fraudulent use of a credit card, or for wilful and malicious injury may not be discharged.
Tax liabilities may be discharged depending on whether a tax return has been filed and sufficient time has passed. Educational loans can be discharged in whole or in part only after proving the existence of undue hardship, something which requires a separate proceeding from the bankruptcy case.Difficult legal questions arise when looking at these kinds of debts. To avoid serious problems, you should discuss these issues with an debt counsellor or with your local Citizen Advice Bureaux before considering bankruptcy.
Many people ask, “Will I have to give up all of my property if I go bankrupt?” The answer is usually that you will not. The law recognises that some things are necessary for a person’s survival. Certain property — like your working tools, cash surrender value of insurance, household furnishings, musical instruments, some bank accounts, retirement accounts, your automobile, and your home — are exempt.
Exempt means that you will be allowed to keep the property as long as the value of the property does not exceed certain amounts and you take the proper steps to claim the exemption in bankruptcy. For instance, a debtor may keep a car as long as the debtor’s interest in the car does not exceed £1,000.00. Household goods are exempt up to £2,000.00 Clothes and jewellery are exempt up to £1,000. All the above exemption figures are only a guide and are not to be taken as is, this all depends on the discretion of the Official Receivers or the Trustee appointed.
IVA (Individual Voluntary Agreement)
Bankruptcy does not make sense for everyone. Other means of debt settlements are available. You may want to consider an IVA if you have debts within a certain range and have a regular income, whether from wages, unemployment, or otherwise and you wish to pay some or all of your debts when you can.
An IVA will permit you to propose a plan for paying off your debts gradually, generally within three to five years. A Bankruptcy allows you to discharge more types of debts than you can discharge in an IVA, but the plan must be approve by the creditors. You will have to agree to give a portion of your income to a trustee (normally an Insolvency Practitioner) who will distribute that money among your creditors on a pro-rata basis.
You will not be able to pay only when you can, but will have to make the payments each month or specified time period. You generally will not lose any of your property in an IVA, and the court can restrain your creditors from garnishing your wages or taking other action against you and your property.
A somewhat similar IVA, if you have a large amount of debts and are involved in a partnership or business, is an IVA for each partner. The IVA’s in this case would be used to reorganise business entities, such as business partnership, but may be used by an individual. As long as you comply with a court approved plan, you will be permitted to remain in business without harassment.
What is a debt relief order (DRO)?
DROs provide debt relief, subject to some restrictions. They are suitable for people who do not own their own home, have little surplus income and assets and less than £15,000 of debt. An order lasts for 12 months. In that time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if your circumstances have not changed you will be freed from the debts that were included in your order.
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.
Is a DRO likely to be suitable for me?
To apply for a DRO, you must meet certain conditions: Only property which you have, and income to which you are entitled, on the date you file bankruptcy is subject to the bankruptcy. Property which is acquired at a later date generally cannot be taken, regardless of the value. If, however, your property is subject to a security interest, or if your house is secured by a trust deed or mortgage, such property will not be exempt from the creditor holding the security agreement or trust deed or mortgage. If you want to keep the property, you will have to continue to make payments to prevent the creditor from repossessing your motor vehicle or the house, despite the exemption from general creditors and from the bankruptcy trustee.
For instance, if you are purchasing a motor vehicle, you most likely will have to sign a formal agreement, called a reaffirmation agreement, whereby you agree to continue making payments to keep the vehicle. This agreement has to be approved by either the Official Receiver or your trustee as in your best interests. If the agreement is approved, you will not lose the property but you will have to keep making the payments. And, the debt will not be discharged in the bankruptcy.
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You must be unable to pay your debts.
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You must owe less than £15,000.
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You can own a car to the value of £1000 but the total value of other assets must not exceed £300.
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After taking away tax, national insurance contributions and normal household expenses, your disposable income must be no more than £50 a month.
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You 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.
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You must not have been subject to another DRO within the last 6 years.
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You must not be involved in another formal insolvency procedure at the time you apply.
If you think you cannot pay your debts and are considering a debt relief order (DRO) this page will give you some information on:
- whether you meet the requirements for a DRO;
- how much it will cost;
- how to get advice and find an approved intermediary;
- how to apply for a DRO;
- what will happen after you apply for a DRO;
- You must be unable to pay your debts.
- Your total debts must not be more than £15,000. This does not include unliquidated debts (debts where the amount due is not yet known) or debts that cannot be included in a BRO.
- Your total assets must not be more than £300.
- Your disposable income after deducting all normal living expenses must not be more than £50 per month.
- You must be living in England or Wales, or at any time during the last 3 years have been resident or carrying on business in England or Wales.
- You must not have been subject to a DRO within the last 6 years.
- You must not be involved in any other formal insolvency procedure at the time of application for a DRO.
- If you have presented a petition for your own bankruptcy and are awaiting a hearing date, you must have been referred to the DRO procedure by the court.
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Restrictions and duties placed on a debtor subject to a DRO:
You have a duty to inform the official receiver of any change of address and any change in circumstances. You must give the official receiver any information they ask for.You will be subject to the same restrictions as bankrupts. There are a number of factors to consider in deciding whether bankruptcy, IVA or a DRO is the appropriate option for you. You may wish to consult an Insolvency Practitioner before proceeding with any of the options.
How to get advice and find an approved intermediary
You can only apply for a DRO through a skilled debt adviser – an ‘approved intermediary’ – who is approved to give advice on DROs by one of the competent authorities. The intermediary will decide whether a DRO is the best kind of debt relief for you.
How to apply The intermediary may complete the form with you, or they may set up the application and let you fill in the form yourself.You should make sure the information on your application is correct and up to date at the time of submission. If not, your application may be rejected, any DRO may be cancelled and further action may be taken against you.
- If you have been notified that a creditor has presented a bankruptcy petition against you, then you must get that creditor’s permission to apply for a DRO.
How much will it cost? The current fee for a DRO is £90. It must be paid to the official receiver, in full, before your application will be considered.
Do you meet the requirements for a DRO?
To meet the requirements for a DRO:
- the effect of a DRO upon you and your creditors;
While DROs are aimed at providing a cheap and accessible form of debt relief, they should not be seen as an easy option for resolving your debt problems.
