Bankruptcy FAQ’s

This is the first in a series of four articles relating to bankruptcy. 1. What does bankruptcy mean?Bankruptcy means that your financial affairs are administered by your Trustee. In other words, he controls all that own including your house. Essentially, his duty is to sell all your permitted assets and use the money to pay as much as possible to your various creditors, that is the people you owe money to.2. What is the difference between Bankruptcy and Insolvency?Not much! The usual definition of insolvency is that you are unable to pay your debts as they fall due. People sometimes take the view that they are still solvent in the value of their assets exceeds the level of their liabilities, even if they are unable to pay their debts when they fall due. For example, if you own a house worth £150,000 and you have a mortgage of £50,000 and the mortgage is your only debt and because of redundancy, you are unable to make payment of one of your installments, then on the first definition of insolvency you are in fact insolvent, whereas many people would say that you are not because, plainly, the value of your house is well in excess of the liability that you owe.3. What is the difference between an Official Receiver and a Trustee?Effectively none. The Official Receiver is the person for that area who oversees the various bankrupts during their period of bankruptcy. Often he and his staff will not have time to deal with all of the work required and the Official Receiver will therefore choose to pass some of it to Licensed Insolvency Practitioners who are known as Trustees in Bankruptcy. In essence, they stand in the shoes of the Official Receiver with his powers and responsibilities. In all the answers provided here Official Receiver and Trustee have the same meaning and therefore will be referred to as the Trustee unless otherwise required.4. How much do I need to owe before I can be made bankrupt either by myself or my creditors?£750 or more, but the Secretary of State can change this by a fairly simple process.5. Doe my bankruptcy affect my wife and children?Legally no, but there are practical issues that might affect them, particularly if you own the house within which you live, either jointly with your wife or wholly on your own, and whether it is subject to mortgage or not.6. What effect will it have on my home?If the house within which you live is rented, and providing the rent is set at an appropriate rate for the property and the area, it is unlikely that the Trustee will take any steps in relation to your home. The Law acknowledges that you need somewhere to live, that you retain tools of the trade, including motor vehicles, where appropriate, and obviously that the home has to be furnished and you need clothes to wear. You will not however be allowed an extravagant lifestyle.If your home is owned by you in your sole name or by you and your spouse/partner jointly, whether subject to a mortgage or not, the Trustee will have to consider what amount of money be can raise with your share of the equity in the property. For example, if your house is worth £150,000 and it is owned jointly between yourself and your wife/partner, and it is subject to a mortgage of, say, £100,000, then your equity in the property is £25,000, which is the maximum amount that the Trustee can expect to receive from the sale of the property. Obviously the expenses of the sale such as Solicitors and estate agents fees, will have to be paid out of the £25,000, and it may not be worth the Trustee forcing the sale if you can find a relative, or somebody to pay a sum of money not necessarily the whole £25,000, to the Trustee on your behalf to buy out your share of the equity. They should be able to negotiate a discount because the Trustee will not have fees to pay and the inconvenience of the sale. All of this presupposes that the mortgage continues to be paid. If not, then it doesn’t matter what the Trustee does, the mortgage lender may well decide to realise their security and sell the house in any event.7. If I have a house with negative equity, would I have to give it up?That would rather depend upon the mortgage lender. If during the continuance of your bankruptcy you were able to continue to make payments either because you have insurance in place, or you are entitled to Housing Benefit (in respect of payments of interest), and the can make repayments of the capital also, so that in effect the Lender is getting normal repayment, then the likelihood is that the Lender would not seek to repossess the property and the Trustee would not be interest because there would be no asset value.8. Assuming that I am made bankrupt, can I rent a property in the private sector, or does the Council have to re-house me?This question presupposes that your home is to be disposed of by the Trustee or mortgage lender. If this is the case, then there is no reason at all why you cannot rent privately, but you will obviously have to pay the rent in advance, or declare to your Landlord that you are an undischarged bankrupt, for your rent is likely to be in excess of £500 per month and you would therefore offend the rule of obtaining credit more than £500 without notification. The rules in respect of Council Housing apply whether you are bankrupt or not. In other words, if you are not intentionally homeless, the Council have an obligation to house you whether a single person, a couple or family. Of course the Council’s housing obligation does not mean that they have to provide you with the sort of accommodation you would wish, particularly where there are children involved.9. What if the home is given to my spouse/partner in a divorce settlement?This is a difficult question to give a general answer to because there are always exceptions, but in very general terms, if the house is given to your spouse/partner as a result of a divorce settlement which occurred before the date of the Bankruptcy Order against you, then the likelihood is that the spouse/partner will retain the interest awarded by the Court. Any Orders made by the Court in relation to the financial provision for your spouse/partner in divorce/separation proceedings will survive the bankruptcy and will be effective during it, so that Orders for maintenance, for example, still have to be complied with. Obviously, if your means are somewhat more restricted than at the date that the Order was made, then you can apply for a reduction in the level of maintenance payments, but you cannot unilaterally reduce them or stop them all together. If arrears accrue during the bankruptcy then those arrears will survive the bankruptcy and you will still be liable for them.10. What if the home is given to my spouse/partner in a legal settlement?Any property which you give to anyone defined as a “connected person” under the Insolvency legislation in the five years preceding your bankruptcy is liable to ‘reclaim’ by the Trustee, particularly if it is thought that the gift is purely to put the asset beyond the reach of your creditors.11. Will the house be sold even if I have children?Eventually, yes. It makes no difference that you have children but see also answer to question 6.12. Can the Trustee sell a second house, perhaps one that I rent or a holiday home?Yes. But, as with your ordinary home, if you can find somebody to buy your interest in the property then it is likely that the Trustee will be prepared to sell to that person. It therefore follows that your spouse/partner, if they have the relevant funds, will be able to make that payment. Again, the Trustee is interest in the asset value, not necessarily the market value. In other words, if the property is worth £100,000, but there is a mortgage of £75,000m then the part of the value that the Trustee is interested in is your share of the uncharged £25,000 equity. If the property is let, or has a good prospect of being let, then don’t forget that the Trustee also has an interest in the income.13. Can the Trustee take our home even if it has never been in my name, but only in my spouse/partner’s name?No. If you have no legal or equitable interest in the property, then the Trustee cannot touch the property. If, however, the property is of substantial value and the Trustee can demonstrate that although in the spouse/partner’s name, you have effectively paid for it, then the Trustee will probably allege that you have an equitable interest in the property and try to negotiate a payment from your spouse/partner. This situation is relatively rare and should be treated on an individual basis.14. All the answers about my house, so far, rely on my partner not being bankrupt but what if we are both bankrupt?Then your respective Trustees will be entitled to your respective shares in the equity unless either of you can find a third person, usually a relative, brother, sister, parent or in law to buy out both your equitable interests from your respective Trustees. In a sense it does not matter who the Trustee gets his money from as long as he gets it.15. Can the Trustee take my home if I live with my parents who own the property, but I stand to inherit it one day because they have left it to me in the Will for when they die?If at the date of your bankruptcy your parents are still alive, and you have no legal or equitable interest in the house that you are living in, then the Trustee cannot make a claim on the property. If, however, your parents die during your period of bankruptcy and in consequence of their Will, or Wills, or the Intestacy Rules, you actually inherit the property, then for all practicable purposes it will not pass to you but your Trustee, who will deal with it as if it was your own. If you are, or contemplate becoming bankrupt, then it will be sensible for your parents to change their Will and either leave the property to someone else or make some other arrangement, until you have your discharge.

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