Bankruptcy

Debt experts’ warning over rising bankruptcy costs

Debt experts’ warning over rising bankruptcy costs

The rise in the cost of going bankrupt could discourage people with financial problems from seeking a solution, debt experts are warning.

The fee for petitioning for bankruptcy rose by £75 to £525 at the start of the month. With the court fee added on, the total upfront cost is £700.

The Insolvency Service said the increase was needed to cover the cost of administration.

The charges, including court fees, have gone up by 37% since March last year.

Insolvency practitioner Mark Sands, from RSM Tenon, has warned that the increase would put extra pressure on individuals who were likely to be under stress or depressed.

“So many people flounder around and do not see a way out,” he said.

“They are going to be put off exploring bankruptcy as a solution.”

Squeeze

The £525 charge is a deposit to cover the cost of managing a bankruptcy, which allows the bankrupt person to throw off the burden of debt and make a fresh start.

The Insolvency Service recovers a full administration fee of £1,715, less the deposit, from the bankrupt’s assets or surplus income at a later stage. This sum is not being increased.

“The fee is staying the same but we are increasing the proportion of that fee which we get on day one,” said the deputy head of the Insolvency Service, Graham Horne.

The Insolvency Service has seen its income squeezed because of the falling value of homes and other assets which are recovered from bankrupts.

Currently, the £1,715 fee is never fully paid in half of bankruptcies.

There has been some criticism of the rising cost.

“It is unfair to families who are struggling but I felt that any money I had was going to be taken anyway,” said a recent bankrupt who spoke to BBC News,

Jon Elwes, from the Money Advice Trust, said: “This increase in the cost of going bankrupt is likely to swell the numbers of people falling through the net of the current insolvency regime.

“Our advisers at National Debtline speak to people everyday for whom bankruptcy would be the best solution to their debt problem, but for the fact they cannot afford the associated fees.”

Lower cost

There is now a cheaper and easier alternative, the Debt Relief Order (DRO), which costs £90. An increasing number of people who are in financial trouble and looking to escape their debts have been avoiding bankruptcy and taking this lower cost route.

In the first quarter of this year there were 6,788 DROs, a 20% rise on the previous year.

However, people can only ask for a DRO if their debts are less than £15,000 and savings and assets are less than £300.

“What if you have £16,000 of debt?”, said Mark Sands of RSM Tenon.

“You are faced with that barrier of hundreds of pounds before you can opt for bankruptcy to resolve your difficulties.”

Una Farrell, from the Consumer Credit Counselling Service, said: “It is a very steep rise. We already have to do a lot of work helping our clients to get the money together to pay the fees.”

But Mr Horne said the Insolvency Service was obliged by Parliament to break even, a task which had become increasingly difficult.

“It has always been our policy that if bankrupts can pay something towards their debts then they should,” he said.

“We have to strike a balance between giving bankrupts debt relief and a fresh start, and the need to provide some return to creditors.”

By Simon Gompertz Personal finance correspondent, BBC News

Definition of Bankruptcy

Definition of Bankruptcy

Bankruptcy, receivership and in administration can mean different things in different countries, in UK this is what it means:

In most countries there are two definitions for bankruptcy. A company that cannot pay its debts because they do not have enough money in the bank, or a company with liabilities (what it owes) that exceed its assets (such as property, inventory or what it is owed).

In the UK when a company cannot pay its debts would usually push the company into liquidation unless it was rescued by a third party.

If however a company has liabilities exceeding their assets , which is sometimes called balance sheet insolvency, the company is more likely to avoid liquidation by negotiating with its creditors.

Companies running out of money instead enter a Company Voluntary Arrangement (CVA), go into administration or receivership, or are wound up.

Most UK firms will not go bankrupt at all, here the term is reserved for personal bankruptcies.

A Personal Bankruptcy whilst seen by many as some kind of failure is in fact there to ‘protect’ the individual from their situation.

It will cease all action against them by their creditors, cease all phone calls, door visits, etc. The individual will be appointed an Official Receiver to go through their situation and deal with the creditors on their behalf.

Suitable circumstances for those who might benefit from entering into the protection of a Bankruptcy Order:

• People with no assets (including homeowners with no equity in their property).
• People living in either rented accommodation or with family and friends
• Those whose employment would not be lost or adversely affected by a Bankruptcy Order. (You can simply check your contract of employment). For example many professions will not accept you as a bankrupt.

Bankruptcy Explained

Bankruptcy

Bankruptcy is sometimes the best solution to enable you to make a fresh start. Only used as a last resort our team are able to assist clients with this difficult but sometimes essential solution.

Advantages of Bankruptcy

• Provides peace of mind and possible automatic discharge after one year
• Gain protection from legal action by creditors
• Allows creditors a full investigation of debtors affairs

Disadvantages of Bankruptcy

• You will not be able to obtain credit for more than £500 without permission
• You lose control of your assets eg car
• You cannot trade in any business under any other name unless you inform all parties concerned of your bankruptcy
• Your credit record will be affected for up to six years after annulment

Is this right for you?

Find out if this is the right solution for you by calling one of our trained advisors

We could help you

• Reduce your Debt Repayments
• Freeze Interest Rates
• Stop Legal Action
• Give you Free Debt Assessment
• Negotiate with your creditors
• Find the best solution for you

What happens to any debts incurred after I have been made bankrupt?

Bankruptcy deals with your debts at the date of the bankruptcy order. After that date you should manage your finances more carefully. If you incur new debts this could result in further bankruptcy order and prosecution if, when you incurred the debts, you did not disclose that you were bankrupt.br / br / The above information is provided by The Insolvency Service and is also available at The Insolvency Service website

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How long does bankruptcy last?

If you were made bankrupt on or after 1 April 2004 you will be automatically freed from bankruptcy (known as “discharged”) after a maximum of 12 months. This period may be shorter if the Official Receiver concludes his enquiries into your affairs and files a notice in court.br / br / If you have been an undischarged bankrupt at any time during the 15 years before the current bankruptcy (unless the previous bankruptcy has been annulled) you will be discharged automatically on 1 April 2009. Or you may ask the court for a discharge 5 years after the date of the bankruptcy order, but the court may refuse or delay your discharge, or grant it conditionally on terms requiring you to make some payments out of your income. You will also become free from bankruptcy immediately if the court annuls (cancels) the bankruptcy order; this would normally happen when your debts and the fees and expenses of the bankruptcy proceedings have been paid in full or the bankruptcy order should not have been made. On the other hand, if you have not carried out your duties under the bankruptcy proceedings, the Official Receiver may apply to the court for your discharge to be postponed. If the court agrees, your bankruptcy will only end when the suspension has been lifted and the time remaining on your bankruptcy period has run.

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How will bankruptcy affect me?

a. In relation to your creditors

If you are made bankrupt, you must not make payments direct to creditors. Creditors to whom you owe money when you are made bankrupt make a claim to your trustee (that is, either the Official Receiver or an insolvency practitioner). They should not ask you directly for payment; if you receive any requests, pass them immediately to your trustee to deal with and tell the creditor that you are bankrupt. There are some very limited exceptions to this non-payment rule. The main ones are:

secured creditors, such as creditors who have a mortgage or charge on your home Note: If mortgage payments are not made, the lender may sell your home.
non-provable debts, such as court fines and other obligations arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991. Non-provable debts are not included in the bankruptcy proceedings and you are until responsible for paying off such debts
benefit overpayments, where the Department for Work and Pensions (DWP) can recover any benefit overpayments from any further benefits you receive
Student loans, since 1 September 2004 all outstanding student loans cannot be claimed in bankruptcy. They remain the responsibility of the (former) student to repay within the terms of the loan arrangement.
If you were made bankrupt before 1 September 2004 you may until have to repay your student loan. Clarification should be requested from the Official Receiver who is dealing with your affairs. Suppliers of services to your home (gas, electricity, water and telephone) may not demand from you payment of bills in your name which are unpaid at the date of the bankruptcy order. But they may ask you for a deposit towards payment for further supplies or could arrange for the accounts to be transferred into the name of your spouse or partner. You must pay continuing commitments such as rent (if you rent your home), together with any debts you incur after the bankruptcy.
b. Payment to creditors

The Official Receiver will tell your creditors that you are bankrupt. He or she may either act as the trustee or may arrange a meeting of creditors for them to choose an insolvency practitioner to be the trustee. This happens if you appear to have significant assets. You may have to go to this (or any other) meeting of your creditors.

The trustee will tell the creditors how much money will be shared out in the bankruptcy. Creditors then have to make their formal claims. The costs of the bankruptcy proceedings are paid first from the money that is available. The costs include fees that the Official Receiver or the insolvency practitioner charge for administering your case.

At least part of the claims from your employees (if any) may be preferential and are paid next, along with any other preferential debts. Finally, other creditors are paid, together with interest on all debts, as far as there are funds available from the sale of your assets. If there is a surplus, it will be returned to you. You would then be able to apply to the court to have your bankruptcy ‘annulled’ (cancelled).

When your trustee makes a payment to your creditors, he may place an advertisement about your bankruptcy in a newspaper asking creditors to submit their claims. Depending on how long it takes your trustee to deal with your assets, this advertisement may appear several years after the bankruptcy order.

c. Your assets

You will no longer control your assets. You can keep the following items unless their individual value is more than the cost of a reasonable replacement:

tools, books, vehicles and other items of equipment which you need to use personally in your employment, business or vocation
clothing, bedding, furniture, household equipment and other basic items you and your family need in the home.
All these items must be disclosed to the Official Receiver who will then decide whether you can keep them. The Official Receiver/trustee will take control of all your other assets on the making of the bankruptcy order. He or she, or any insolvency practitioner who is appointed as trustee, will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and then your creditors. If appointed, the insolvency practioner’s fees for acting a trustee are also paid from the money raised by selling your assets. The trustee may apply to the court for an order restoring property to him or her if you disposed of it in a way which was unfair to your creditors (for example, if before bankruptcy you had transferred property to a relative for less than its worth). The trustee may claim property which you obtain or which passes to you (for example, under a will) while you are bankrupt. A student loan made before or after the start of a student's bankruptcy is not regarded as an asset that the trustee may claim, if a balance of the loan remains payable. If you have made a claim against another person through court proceedings, or you think you may have a claim (a right of action) against another person, the claim may be an asset in the bankruptcy.

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How am I made bankrupt?

A court makes a bankruptcy order only after a bankruptcy petition has been presented. It is usually presented either by yourself (debtor’s petition); or by one or more creditors who are owed at least £750 by you and that amount is unsecured (creditor’s petition).br / br / A bankruptcy order can be made even if you refuse to acknowledge the proceedings or refuse to agree to them. You should therefore co-operate fully once the bankruptcy proceedings have begun. If you dispute the creditor’s claim, you should try and reach a settlement before the bankruptcy petition is due to be heard. Trying to do so after the bankruptcy order has been made is both difficult and expensive.

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What is bankruptcy?

Bankruptcy is one way of dealing with debts you cannot pay. The bankruptcy proceedings free you from overwhelming debts so you can make a fresh start, subject to some restrictions; and make sure your assets are shared out fairly among your creditors.br / br / Anyone can go bankrupt, including individual members of a partnership. There are different insolvency procedures for dealing with companies and for partnerships themselves.

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