BBC News website's Ask the Expert column gives readers a chance to have their financial questions answered.
This week's expert is Daniel Izza
Your Money reader Janice Dawe would like to know what sanctions are in place to discourage bankruptcy.
Legal expert Daniel Izza, a partner at law firm Laytons, answers the question.
Daniel Izza writes:
The procedure for becoming bankrupt has become more straightforward, but the consequences can be long-standing for both the bankrupt and their family.
Petitioning for one's own bankruptcy is very easy. You are required to:
A person who petitions their own bankruptcy can be made bankrupt on the same day.
- Fill in a form at your local county court
- List your assets and liabilities
- Pay a court fee and deposit (for estate administration)
After the Bankruptcy Order is obtained, the bankrupt will need to arrange an appointment with their local Official Receiver.
The Official Receiver is an officer of the court who has the job of reviewing the conduct of the bankrupt. The bankrupt will be required to explain to the Official Receiver the reasons for their bankruptcy and the level of debt.
All this sounds rather simple. Since April 2004, in most cases you remain bankrupt for one year (previously it was three years) before you are automatically discharged and you can start afresh.
There are, however, negative consequences which arise from bankruptcy making it not so desirable to use bankruptcy as a way of bounding free of debt.
The bankrupt's home
The Trustee in Bankruptcy has three years within which they can deal with the bankrupt's property.
So just because the bankruptcy order is discharged after a year does not mean you are free from further action in respect of your assets.
It is quite common to forget after the order has been discharged that your home (or share of it) remains in the possession of the Trustee, and bankrupts can have their home virtually sold from under them.
Particularly worrying is the impact this may have on third parties such as the bankrupt's spouse or former spouse.
The property concerned can include not just property registered in the name of the bankrupt, but property registered in joint names with a spouse or former spouse - such as the matrimonial home.
The Trustee has three years in which he may either:
- Sell the bankrupt's property
- Apply for a charging order on the bankrupt's property
- Come to an agreement with the bankrupt (or their spouse) regarding a settlement of the Trustee's interest in the matrimonial home.
CONCERNED ABOUT DEBT?
National Debtline: A free, confidential and independent service funded by the Department of Trade and Industry and the credit industry. Tel: 0808 808 4000
Business Debtline: Provides a free telephone debt counselling service for self-employed and small businesses, funded by banks. Tel: 0800 197 6026
Consumer Credit Counselling Service: Funded entirely by the credit industry, the service offers advice to people in debt. Tel: 0800 138 1111
Citizens Advice: Offers free, independent and confidential advice from more than 700 locations throughout the UK. Tel: 020 7833 2181
A bankrupt may also have a Bankruptcy Restriction Order (BRO) imposed on them after the expiry of one year, if they have conducted them self in an unfit manner before or during his bankruptcy.
Examples of conduct likely to be considered unfit include:
- Where a person incurs more debt knowing that they will be petitioning for bankruptcy
- The bankrupt sells assets and gives the money to their children or spouse
The bankruptcy restrictions can include:
- Banning the bankrupt from being a director of a company
- Requiring the bankrupt to disclose their bankruptcy status when obtaining credit for more than £500
- If the person was a trader and wishes to trade they could be required to disclose to those with whom they do business, the name they used at the time of the bankruptcy.
A BRO may last for a period between two and 15 years.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.