What is Bankruptcy and When Does it Apply?

Bankruptcy is a legal status that applies only to individuals who can’t pay off their debts, and it lasts for 12 months, after which the debts are cancelled (“discharged”).

Although company bankruptcy is often used as a search term by directors, this is technically incorrect. Bankruptcy applies to an individual, not a company – unlike in the United States.

There are two situations when bankruptcy can happen:

1. Individuals who aren’t able to repay their debts can declare themselves bankrupt;
2. Creditors can also make an individual bankrupt.

What’s the Process?

In case you declare yourself bankrupt, you can apply online via the UK’s government website, and pay a fee of £680. After you apply, an Adjudicator (a person working for the Insolvency Service) will analyse your case and decide whether you should be made bankrupt or not.

If you’re allowed to enter into bankruptcy, then:

• You’ll get a copy of the bankruptcy order (you may also be called in for an interview about your situation);
• The assets you own can be used to pay off the debts;
• You’ll be asked to follow the bankruptcy restrictions (borrowing more than £500 without saying that you are bankrupt; acting as a director, creating, managing or promoting a company without the court’s permission; working as an Insolvency Practitioner). Remember that breaking these restrictions is a criminal offence.
• Your name and details will be published in the Individual Insolvency Register (IIR) – if publishing your details will put you in peril, you can apply to get these removed.
• Your creditors can also make you bankrupt if:
• You owe over £5,000, and you haven’t paid off your debts;
• You broke the Individual Voluntary Arrangement (IVA) terms;
• You gave false information to receive an IVA.

How to Apply

To apply for bankruptcy, these are the forms you need:

1. The petition for bankruptcy (includes the reasons for your request);
2. The Statement of Affairs;
3. A sworn statement (made before an officer of the court/solicitor).

What Happens When the Bankruptcy Ends?

The bankruptcy period normally lasts for 12 months, after which the individual the from any restrictions and debts, and all details will be removed from the Individual Insolvency Register (IIR). The discharge is automatic.

If the individual who has applied for bankruptcy doesn’t cooperate with the trustee, the process can last longer than 12 months.

Can you Cancel your Bankruptcy?

Individuals who are in bankruptcy can annul it before getting discharged if they:

• Have paid their debts in full;
• Entered into an Individual Voluntary Arrangement.

Alternatives

There are several alternatives to bankruptcy, but they all need the creditors’ approval:

• An informal agreement;
• An IVA;
• An administration order (AO);
• A debt relief order (DRO).

What’s the Difference Between Bankruptcy, Liquidation and Insolvency?

Insolvency is the global term for all types of financial failures, including bankruptcy and liquidation. The main difference between the two is that bankruptcy only applies to individuals, whereas liquidation is applicable only to companies, Limited Liability Partnerships and Partnerships.

Summary

Remember that bankruptcy:

• Applies only to individuals;
• Can be done voluntarily or compulsorily;
• Only last for a year;
• After the 12 months’ period, the debts and restrictions are cancelled.

We can help you

If you are planning to declare yourself bankrupt or if creditors are trying to make you bankrupt, don’t hesitate to contact us as we’ll provide you with the best business advice on the market. There are various contact options you can choose from telephone (0800 074 6757) or live support via the below chat window.