Layman's Guide to personal insolvency and the available options & benefits
Insolvency Advice For Individuals On PAYE, Sole Traders Or Partnerships
A laymans guide to personal insolvency and possible routes for you to restructure your liabilities under alternative personal insolvency processes.
1. Aim of Article
The aim of this article is to provide advice about alternatives which may be available to you, which might include:
- Doing nothing
- Administration order
- Negotiation with individual creditors
- Voluntary Arrangements
- Debt Relief Orders
and advice about the procedure to be followed depending on which alternative you choose to follow.
We also offer advice about the implications on your main areas of concern, which are likely to be:·
- Your home
- Your furniture
- Your car
- Your employment or your business
- Your future
- Any restrictions that might be placed against you.
2. Doing Nothing
2.1 If you decide to do nothing what options do your creditors have in pursuing you. These are:-
- Court judgment, followed by either
- Bailiff action, or
- Attachment of earnings order, or
- Garnishee order (over bank accounts and debtors for example), or
- Charging order - over your home, or
- Bankruptcy petition.
2.2 Who ultimately benefits if your creditor does not take immediate action? That creditor generally has six years to take action. (although there are exceptions).In that six years is the equity interest in your home likely to increase?
Who will that increase benefit? Answer: Your creditors, not you!
2.3 Is "doing nothing", therefore, a reasonable option for you and your family? Purnells can assist you to limit your exposure and crystallise your exposure to a set sum.
3. Administration Orders
3.1 Do you owe less than £5,000 but to very many creditors? Do you also have a County Court Judgment against you?
3.2 If so you can apply for an administration order.
3.3 Such an order will take a lot of pressure off you as individual creditors can no longer chase you.
3.4 Under an administration order one payment per month is made to the Court.
3.5 The disadvantage to an administration order is that the full amount remains owing.
3.6 If an administration order is the best route for you to take copies of the Court papers will be sent to you, if requested, with this booklet together with a letter of explanation as to how to apply for such an order.
4. Negotiations with Individual Creditors
4.1 You may, quite reasonably, wish to avoid entering into any formal court based arrangement with creditors. You may prefer for us, or you, to individually negotiate with creditors.
4.2 In practice we find that "individual negotiations" only have a chance of working if you have three creditors or less.
4.3 If you have three creditors or less we will send a letter of advice with this booklet as to what can be done and how.
5. Bankruptcy (or Voluntary Arrangement?)
5.1 We find that a voluntary arrangement can be best understood if, first of all, you understand bankruptcy both in respect of:
- the procedure
- the implications.
5.2 You will need to know how long a bankruptcy lasts (generally one year - but is your situation different?)
You will need to know how the following matters are dealt with in bankruptcy:
- your home,
- your furniture,
- your employment, or · your business
- your pension
- your car,
- your future
- hire purchase agreements.
And you also need to know the answers to the following questions:
- Can you be self employed in a bankruptcy?
- Can you have a bank account?
- How do you rebuild your credit?
- What is the £500 rule?
- What happens to windfalls and inheritances?
- Can the Official Receiver claim any of your income for the duration of the bankruptcy?
These issues are addressed in the paragraphs that follow.
5.3 YOUR HOME
You must first determine whether there is any equity in your property by obtaining a market valuation from a reputable chartered surveyor and by obtaining documents to confirm the exact amounts owing on any mortgage(s) and also the value of any endowment policy(ies) backing up that mortgage.
The interest that you have in your home will then fall into one of three categories:
- Negative equity or
- Nil equity or
- Equity of a certain amount.
5.4 NEGATIVE EQUITY
If there is "negative equity" in the property you may wish to do one of two things.
- you may wish to hand the keys back. If so, the full amount of any loss the mortgage company makes will be written off in the bankruptcy or
- If practical so to do you may wish to retain the property.
To retain the property and to remove it from future attack by your creditors you can either:
- transfer the "legal interest" to your spouse, or other person. (by using a solicitor in conjunction with Purnells)
- if the mortgage company will not allow you to transfer the "legal interest" then it is possible to achieve a similar result by transferring the "equitable interest" (by using a solicitor in conjunction with Purnells).
You will remain responsible for repaying the full amount on all the mortgages if you retain the property.
At an interview we wil explain the absolute necessity of transferring either the legal or equitable interest.
5.5 NIL EQUITY
If there is "nil equity" in the property and you wish to retain that property then you still need to transfer the interest in the property by agreement with the Official Receiver. It is often however best to transfer the property pre bankruptcy. Discuss the matter with us so that you understand what advantages that will give you.
5.6 SOME EQUITY
If you have some equity in the property you need, first of all, to determine "your share" of the interest in the property.
In a bankruptcy the Official Receiver (O.R.) or Trustee, will wish to receive from your spouse the amount of your share in the equity. On receiving such amount the O.R. will then consent to the transfer of either the "legal interest" or the "equitable interest" in the property.
A person who has been made bankrupt generally has one year after the bankruptcy order is made to have his share purchased by his spouse.
After one year if no action has been taken the O.R. has the option to take possession proceedings. If the OR or Trustee has taken no action after three years (for post 01.04.2004 bankruptcies) then generally speaking the house is not subject to further attack. It is essential, however, that you take advice on your individual circumstances.
Purnells may be able to "save" your house ahead of a bankruptcy and provide you with certainty as to your future occupation of the property. At interview we wil explain more.
5.7 YOUR FURNITURE
In 99% of cases in a bankruptcy your furniture is not touched. A representative of the Official Receiver is most unlikely to even visit your home.
The only times certain categories of "furniture" are removed are for instance:
- if you have a "Picasso"
- or if you live, just two of you, in a very, very large house and the furniture owned is beyond your "reasonable needs".
5.8 YOUR EMPLOYMENT
Unless you work in a financially sensitive job (and there are rules in your contract of employment or rules of any professional association) then your job will not be affected and it is most unlikely that your employer will be contacted by the Official Receiver.
There will be no "attachment of earnings" order made on your employer. (see later notes in this booklet, regarding "income payments" orders.)
5.9 YOUR SELF-EMPLOYED BUSINESS
There is no bankruptcy rule that says that you cannot be self employed in the bankruptcy period.
It is more a practical matter as to whether the nature of your particular type of self employment requires finance to enable you to operate.
There are, however, two bankruptcy rules which impinge on self employment.
- You must trade in your own name and not in a made up name.
- The £500 credit rule (This rule says that, during the bankruptcy period, that if you wish to take credit or borrow more than £500 you must advise the person who is providing the credit that you are in bankruptcy).
You could borrow £10,000,000 or more! - but you have to advise the lender before taking such credit.
It is also interesting to note that there is no bankruptcy rule which prevents a bankrupt holding a bank account. An individual bank manager, however, may not be forthcoming in providing such an account.
5.10 YOUR PENSION
Whether or not your entire future pension entitlements can be taken by a trustee in bankruptcy depends on whether the bankruptcy petition (note - not the bankruptcy order) was presented before or after the 28th May 2000
- If the bankruptcy petition was issued by the court pre 28th May 2000 (even if the bankruptcy order is made after the 28th May 2000) then most pension rights will become "owned" by the trustee. In other words your entire pension rights are lost. (There are certain exceptions to this general rule).
- If the bankruptcy petition is issued after the 28th May 2000 however you will retain your pension rights.
This rule introduced by the Welfare Reform and Pension Act 1999 means that the following types of pension are now protected from a trustee in bankruptcy -
- occupational pension schemes
- retirement annuity contracts
- personal pension schemes
- Remember, however, that if you receive any part of your pension annuity in the bankruptcy period then such income will be counted in the calculations by your trustee in determining whether or not you have any "surplus income". (see notes at 5.12)
- If the lump sum entitlement under your pension becomes available in the bankruptcy period such sum is likely to be claimed by the trustee in Bankruptcy.
5.11 YOUR CAR
The first thing you need to do is to get a valuation of the car (not from your local garage) but from a firm of car auctioneers or Chartered Surveyor specialising in such valuations.
If the car is worth £2,000 or less (and you need it for your employment or business) then the Official Receiver will not take the vehicle from you.
If, however, the vehicle is worth, say £4,000, the Official Receiver will: ·
- either sell the car and give you back £2,000 or so
- or wish to receive from your spouse or other third party the sum of £2,000 or so and will then allow you to retain the vehicle.
5.12 YOUR FUTURE
The Official Receiver will examine
- your net monthly family income
- your monthly unavoidable family expenditures
to determine whether there is any surplus amount each month. If there is any such surplus he will require you to sign an "Income/Payments order" to pay over to him monthly your proportion of that surplus.
Income/Payments orders only apply for the period of the bankruptcy. If your circumstances change in that period so does the amount of the income payments order. Income/Payments Orders or agreements generally last for three years even though you are likely to be free of the bankruptcy restrictions after one year.
5.13 THE STRANGE TAX RULE IN THE YEAR OF BANKRUPTCY
If you are a PAYE employee then from the date of bankruptcy to the following 5th April you will have no monthly deduction for PAYE.
Your take home pay may, therefore, increase dramatically.
This will have an impact on the calculation of the income payments order.
If you are self employed then from the date of bankruptcy to the following 5th April you will have a tax holiday.
5.14 HIRE PURCHASE AGREEMENTS
Before you can decide how such an agreement may be treated in your particular case you must obtain two documents.
- a valuation of the asset
- the settlement figure on the HP agreement.
If there is no equity the O.R. will not be interested. You will however need to negotiate with the HP company to see if they will permit you to retain the asset in exchange for continued HP repayments..
If there is equity you need to do certain things (if you so choose)
- arrange for a third party to pay the equity amount to the O.R.
- after first confirming with the HP company that they will permit you to continue with the use of the asset.
Alternatively, in either case, you can hand the asset back to the finance company concerned.
5.15 WHAT CREDITORS ARE NOT WRITTEN OFF IN A BANKRUPTCY
Creditors not written off in a bankruptcy and in respect of which you will remain responsible are: ·
- Fines imposed for offences
- amounts due under orders in family proceedings (for child support etc)
- certain other categories of creditor
If you have, say, an inheritance or, a lottery win in the period of the bankruptcy then such amount must be paid to the Official Receiver. (to the extent that it is needed to pay in full the costs of the bankruptcy plus the full amount of creditors claims, together with interest on those claims).
5.17 WHAT ARE THE OFFICIAL RECEIVERS DUTIES?
- To interview the bankrupt and to complete a "Preliminary Action Report" as to whether further enquiry is needed. In serious cases the OR may apply for a Bankruptcy Restriction Order (BRO) which will extend the bankruptcy for a period of more than one year.
- to advise creditors of the financial position and to call a creditors meeting if considered necessary.
- to organise the appointment of a private sector practitioner to act as trustee if the value of assets in the bankruptcy justifies such a step.
- (The purpose of a creditors meeting is to obtain the appointment - on a creditors nomination - of a private insolvency practitioner to act as "Trustee in Bankruptcy")
- If the assets in the matter are small in value to consider whether to appoint a private insolvency practitioner as Trustee from a "rota" of such practitioners.
5.18 WHAT ARE THE TRUSTEES DUTIES?
- To collect in all the assets.
- to pay a dividend to creditors.
5.19 HOW DO I GET MY RELEASE FROM BANKRUPTCY?
Release from bankruptcy, at the end of the one year period, is automatic if no bankruptcy offences have been committed.
A "certificate of discharge" to confirm that the bankruptcy has actually ended can be obtained from the court. It is not however necessary to obtain such a certificate owing to the "automatic" ending of the bankruptcy in the majority of cases.
5.20 WHAT "CAPITAL" AND "INCOME" SAVINGS WILL BE MADE AS A RESULT OF A BANKRUPTCY
5.20.1 Capital Savings
All creditors which are not secured are written off in a bankruptcy.
This includes personal creditors, business creditors, VAT, Tax, etc.
5.20.2 Income Saving
The income saving that is made arises as a result of not having to pay in the future any of the creditors (apart from the "secured" creditors).
6. Individual Voluntary Arrangement (IVA)
6.1 The concept of an "individual voluntary arrangement" (IVA) was first brought into law in 1986 as the government wished to give individuals every possible opportunity of avoiding bankruptcy (and the restrictions that go with bankruptcy).
6.2 Under a voluntary arrangement you make a "proposal" (or offer) to your creditors. That offer has to relate to your personal circumstances.
- it may be an offer of repayment of 10 pence in the pound of what is owing.
- or it may be an offer of 100 pence in the pound over an extended period.
6.3 The amount of the offer may partly depend on the "surplus" shown by your own individual income/expenditure statement.
Such a voluntary arrangement is based solely on the offer of making repayments out of income.
6.4 The idea that creditors will be offered more in a voluntary arrangement than they would receive in a bankruptcy is fundamental.
It is for that reason that when a voluntary arrangement is proposed, out of excess income, that:
- Because in a bankruptcy payments would have to be over 3 years
- In a voluntary arrangement creditors will wish to see payments over a longer period - say 4 or 5 years
6.5 Another form of voluntary arrangement is one where a relative may be able to provide a "gift" of a certain amount. That "gift" is then offered to the creditors to provide them with 20p (or whatever) in the pound in full and final settlement.
The creditors may be interested in accepting such an offer if it is more than they would get in a bankruptcy.
6.6 Sometimes it is possible to propose a voluntary arrangement when:
- It is neither out of "excess income"
- Nor is it out of a "gift".
Such an arrangement could arise, say, when an individual had realisable assets of £20,000 and creditors of £40,000.
The advantage to the creditors in this type of an arrangement is that the costs in a voluntary arrangement are less than the costs in a bankruptcy.
6.7 In a bankruptcy there are a number of charges made. You will note that there are several classes of fees.
- Standard Fees
- Official Receivers costs on a scale rate basis
- Secretary of State Fees on Realisations - 17% on all assets (except the first £2,000 of such assets)
An illustrative calculation would show that if realisations of £20,000 were made in a bankruptcy then total costs might be £7,407 reducing the amount available to creditors to £12,593.
If the creditors totalled £40,000 that would represent a return of 31.5 pence in the pound.
By way of contrast the costs in a voluntary arrangement might only be £3,500. That would leave £16,500 for creditors. Representing a return of 41 pence in the pound.
6.9 Sometimes a voluntary arrangement proposal may contain elements of all of the above.
- it may partly involve income payments over a period
- and it may involve a "gift"
- possibly it may involve the realisation of existing assets
- and the entire proposal is improved, in any event, as the costs of a voluntary arrangement are less than those in a bankruptcy.
6.10 The Choice
Should you: ·
- either propose a voluntary arrangement
- or petition for bankruptcy
It is always your personal decision. Purnells generally do not wish to point you one way or the other. We would rather point out the pros and cons of each route having regard to your own specific personal circumstances.
6.11 The Proposal Document
An example of a typical draft proposal can be provided to you by Purnells.
Such a draft would be personalised to your circumstances and the type of offer that was being made.
Once a draft proposal has been personalised you would then read through it and prepare a list of points for discussion.
Then the proposal would be amended until you were happy with the final version.
In terms of procedure what then happens, is as follows:
6.12.1 You take a copy of the proposal to Purnells solicitor and there you swear an affidavit that the contents of the proposal are true.
6.12.2 We then make an appointment with the court (you do not have to go to court).
6.12.3 At the court appointment the judge, if he is happy with the proposal, makes what is known as an "Interim Order".
6.12.4 That "Interim Order" basically says two things: ·
- Firstly that a creditors meeting should take place at a certain date and time to consider the proposal. (Usually that meeting is at the offices of Purnells on a date and time previously agreed).
- Secondly, that no unsecured creditor can take any legal action against you before the day of the creditors meeting.
(Eg. An "Interim Order" will stop: ·
- All applications for county court judgments
- Bailiff actions
- Bankruptcy orders, etc)
6.12.5 Purnells then receive the "Interim Order" back from the court.
At this stage the creditors meeting is called. Each creditor is sent: ·
- A copy of the proposal
- Purnells "Nominees report" on the proposal
- A form (proof of debt) for the creditor to fill in to say how much they are owed.
- A further form - a voting form (known as a proxy) for the creditors to return to indicate whether or not they agree that which is proposed.
6.13 The Creditors Meeting
On many occasions no creditor turns up at the meeting. They merely send in their voting forms by post, fax or email.
On other occasions, one or two creditors may send representatives along to the meeting.
Creditors can do one of three things when they vote:
- Agree what is proposed
- Reject what is proposed
- Suggest modifications to that which is proposed.
To get a voluntary arrangement agreed 75% in value of the creditors who vote must agree to the proposal for it to be binding in law.
From this you can see that the creditors who are owed most have more influential votes.
Such creditors may use that influence to suggest "modifications" to that which you proposed.
For example, you may have proposed that you make payments of £300 per month from income for a 3 year period. The modifications suggested might be that you pay £400 per month over a 4 year period.
Inevitably you cannot know what modifications, if any, will be proposed until the day of the creditors meeting.
It is then for you to decide whether whatever modifications are put forward are acceptable or not. This is why when putting forward a voluntary arrangement you fully understand the alternative which is bankruptcy.
If you are unsure at the meeting whether or not to agree modifications or you want time to negotiate with certain creditors it is possible to adjourn the meeting for up to fourteen days.
6.14 If the arrangement is rejected
If the agreement is rejected you are placed in exactly the same position as you were before the voluntary arrangement was put forward. In these circumstances it may be in your best interests to petition for bankruptcy.
6.15 If the arrangement is agreed
If the arrangement is agreed then a contract is in existence between you and your creditors. The "contractual documents" are:
- firstly the voluntary arrangement proposal itself.
- secondly, Purnells "Chairmans Report" as to the result of the creditors meeting. This report lists out all, if any, modifications to the proposal which were agreed at the creditors meeting.
Under the terms of the proposal a "Supervisor" is then appointed.
It is then the Supervisors job to ensure that the "contract" is followed to the word.
6.16 Success or Failure
The live voluntary Arrangement, monitored by the Supervisor can then either succeed or fail.
If the voluntary arrangement is brought to a successful conclusion by the Supervisor making the dividend payments at the appointed time then that is the end of the matter. You will then be free of all of your previous preferential and unsecured creditors.
For whatever reason, however, the Supervisor may have to declare the voluntary arrangement a failure. This could happen, for instance, if the monthly payments agreed were not paid. Quite often, in these circumstances, the Supervisor may have a duty (created by a modification to the proposal) to petition for your bankruptcy.
For the reason stated above a voluntary arrangement should not be entered into lightly.
You should quietly examine right from the beginning whether petitioning for bankruptcy or applying for a voluntary arrangement is the right route for you.
Unfortunately, sometimes, it will only be hindsight which will confirm which route would have been best for you. That is why Purnells do not advise whether you should pursue bankruptcy or a voluntary arrangement. It is far better for you to understand the pro's and con's of each alternative route and then make your own decision based on those facts.
7. Restoring your Creditworthiness after a Voluntary Arrangement or a Bankruptcy
Both voluntary arrangements and bankruptcies are registered with the major credit reference agencies such as CCN and Equifax.
Future prospective lenders can, therefore, obtain knowledge of a bankruptcy or voluntary arrangement by undertaking a "Credit Search".
Such prospective lenders need evidence that the problems of the past have been overcome.
One way that this can be done is as follows:
Imagine you have just completed your bankruptcy period and you are living in rented accommodation which costs you £350 per month. It would be then to your advantage, if possible, to regularly save a set sum - say £200 per month with a building society.
After a further two years you could approach that building society manager for a mortgage.
Your evidence would be:
- A reference from your landlord that you had paid £350 per month on time for a period of years.
- The building societies own records which would show that you had regularly saved £200 per month for a two year period (and had a deposit of £4,800). In these circumstances you can see why a building society manager might then be inclined to make an offer of mortgage.
For more information on any aspect of this layman's guide to personal insolvency please contact us.
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