Bankruptcy and the Law
Bankruptcy is a personal debt solution. It is relevant for individuals who are struggling to pay their debt. In England and Wales Bankruptcy is governed by the Insolvency Act of 1986. The law was later amended by the Enterprise Act of 2002.
BE Tip: Bankruptcy is Scotland is governed by different rules as per the local insolvency law. As such the information on this page does not apply to you if you live in Scotland.
Bankruptcy and the Insolvency Act 1986
The Insolvency Act of 1986 is the foundation of bankruptcy law in England and Wales. It defines who is eligible to declare themselves bankrupt and the type of debts that can be included in bankruptcy.
The act also prescribes what will happen to an individual’s assets when they are declared bankrupt and the length of time that bankruptcy will last. However the Insolvency Act rules were amended with the introduction of the Enterprise Act of 2002.
Bankruptcy and the Welfare Reform & Pensions Act 1999
The Welfare Reform & Pensions Act 1999 (introduced 29th May 2000) saw a fundamental change to the way that an individual’s pension fund could be affect by Bankruptcy. If you went bankrupt before this date your pension fund was included as part of your assets and was then available to the Official Receiver. However as a result of this Act pension funds became exempt from Bankruptcy.
This means that if you go bankrupt now your pension fund is protected. This is currently the case even if you reach the age of 55 while you are Bankrupt.
Bankruptcy and the Enterprise act 2002
The Enterprise Act introduced some major changes to the Bankruptcy rules. Two significant changes involve the length of Bankruptcy and the equity in a bankrupt person’s property. The Act reduced the standard length of bankruptcy from 2-3 years to just 12 months. After this time the bankrupt person is automatically discharged. In addition the Official Receiver must now act to release the equity from a bankrupt person’s property within 3 years. If they have not taken appropriate action by that time the beneficial interest automatically vests back to the individual.
BE Tip: Certain affects of Bankruptcy can still be extended for longer than 12 months with a Bankruptcy Restrictions Undertaking (BRU). However this is rare.
After the changes brought in by the Enterprise Act many people thought that Bankruptcy had become a much easier option. However in reality this is not the case. The way that assets such as property are dealt with has not changed. In addition the individual will still have to pay towards their debts for 3 years if they can afford to do so.
Publication of Bankruptcy in the local newspaper
In April 2009 the rules surrounding the publication of bankruptcy in England and Wales were changed. As a result the Official Receiver no longer has to advertise bankruptcy in the local newspaper. They still have the option to do so if they feel it is appropriate but this is rare.
Nevertheless Bankruptcy should not regarded as a private procedure. A bankrupt person’s details are still recorded in the Insolvency Register which is publicly accessible via the internet. The details if each bankruptcy are also registered in the London Gazette.
BE Tip: All bankruptcies in Northern Ireland are still advertised in the Friday edition of the Belfast Telegraph.
Paying towards debts after Bankruptcy
On the 1st December 2010 the rules surrounding how much a bankrupt person has to pay towards their debt was changed. Prior to that date if you had disposable income of up to £100 you would be able to keep that money. If your disposable income was greater than £100 you would have had to make a payment towards your debt based on a percentage of your disposable income.
Since 1st December 2010 the Official Receiver must now insist you pay 100% of your disposable income towards your debts. This is in the form of an Income Payment Agreement (IPA). As a result you are likely to have to start paying an IPA even if your disposable income is less than £50 a month.
Buying back the beneficial interest in a Property
In January 2011 the rules changed about how a bankrupt person can buy back the beneficial interest in their property. Previously if you owned a property with equity of £5000 or less you could offer the Official Receiver (OR) an amount of less than the value of the equity. If the equity was less than £1000 the beneficial interest could have been bought back for just £1.
However since January 2011 if there is equity in your property you will have to offer an amount equal to the value of the equity to buy back your beneficial interest. An offer of anything less will be rejected by the OR.
If after 2 years and 3 months if you have not bought back your beneficial interest and the equity in the property is less than £1000 the OR must simply hand it back to you for nothing. However if the equity is more than £1000 then your beneficial interest can only be bought back by paying an amount equal to the equity at that time.
Early Discharge from Bankruptcy
The most recent change to the rules governing bankruptcy was introduced on the 1st October 2013 by the Enterprise and Regulatory Reform Act 2013 (section 73 and Part 3 of Schedule 21).
Before this Act the Official Receiver (OR) had to option to discharge an individual early from their bankruptcy. The OR may have finished their investigation into the individual’s affairs and concluded that there was no reasonable prospect of them ever being able to pay anything towards their debts. At this point they could have been immediately discharged.
However the Enterprise and Regulatory Reform Act 2013 has closed the door on this early discharge option. Now everyone who is declared bankrupt must remain so for 12 months and cannot be given an early discharge.
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