Seeking expert advice

I have read many of the recent flurry of articles appearing in the national press and trade journals concerning the substantial increases in personal insolvencies. Clearly, there is a need for mortgage brokers to be able to identify instances where clients need help and advice, indeed, they are required to do so by the MCOB rules.

There are also more opportunities for mortgage brokers, packagers and other financiers to do businesses in such situations. However, I always suggest that brokers and packagers should avoid falling into the trap of holding themselves out as experts in personal insolvency matters and should refer their clients to an insolvency practitioner who is qualified to make an assessment of the circumstances and provide best advice on the full range of available options.

The above-mentioned articles concentrated on the specific situation where a petitioning creditor enforces bankruptcy on an individual who owns a home and where there is sufficient equity to pay off their unsecured debts and the costs and expenses of the bankruptcy in full. It is suggested that bridging finance should be obtained with an application to court for an annulment of the bankruptcy order and subsequent remortgage.

It is important to appreciate that the route suggested might not be appropriate or even possible where, for example:

• the debts, costs and expenses of the bankruptcy cannot be paid in full. There may be numerous other unsecured debts in addition to that of the petitioning creditor.
• the initial cost of raising finance (which I understand to be as much as 10 per cent for bridging finance, plus interest, plus whatever fee is charged for arranging the mortgage) cannot be paid in full.
• the headroom is insufficient to cover the loan-to-value criteria of the lenders.
• the property is jointly owned.
• the property is jointly owned and the non-bankrupt spouse has a claim under the equity of exoneration.

There are other options following bankruptcy, which do not require bridging finance and may be more appropriate and can equally get the bankrupt back on track to prime borrowing. For example, where a spouse, a relative or third party can raise sufficient funds to pay the debts, costs and expenses of the bankruptcy. In this instance:

• creditors can be contacted to agree their claims and their consent to waive their entitlement to receive statutory interest.
• the costs of the bankruptcy can be agreed.

• funds can be raised and costs paid outside of the bankruptcy to avoid payment of Secretary of State fees on realisations an annulment of the bankruptcy order can be obtained.

An Individual Voluntary Arrangement (IVA) might be appropriate in situations where sufficient funds can be raised to pay either the debts, costs and expenses of the bankruptcy in full or a substantial dividend to creditors. In this scenario, the IVA proposals can be drafted in such a way as to enable:

• interest on debts to be frozen all creditors to be bound by the terms of the IVA proposals.
• an annulment of the bankruptcy order to be obtained following approval of the IVA.
• fees to be fixed so that there is more certainty as to the likely dividend to creditors.
• a mechanism so that creditors claims can be agreed the debtor to be free to remortgage to raise the agreed lump sum in settlement of creditors claims

Where sufficient funds cannot be raised as a one-off lump sum to pay a substantial dividend to creditors, then an IVA might still be appropriate where the bankrupt and his spouse has disposable income and can afford to pay a monthly contribution over a five-year period. This could also involve a remortgage at the end of the arrangement in lieu of any equity in the property.

The bankrupt might be financially better off by staying bankrupt and simply negotiating and agreeing the value of the Trustee’s interest in the property where this is small. This option could particularly be appropriate where the bankrupt’s spouse has a valid claim under the equity of exoneration. This could eliminate all or part of the Trustee’s claim over the equity in the property. Such claims often arise where funds have historically been raised against the security of a jointly owned property from which the non-bankrupt spouse has received no benefit whatsoever, for example, where funds have been invested in a failed business venture.

Bridging finance is not required where the bankrupt has obtained his discharge. This is usually after 12 months of the making of the bankruptcy order, but could be after only several months.

I certainly take on board the fact that matters can be made difficult in a bankruptcy where an over-exuberant independent Trustee has been appointed and costs escalate. However, in some circumstances, an application can be made to court for a stay of proceedings in order to prevent costs being incurred unnecessarily. Where the debts and costs are not being repaid in full and an IVA is not being proposed, costs are irrelevant.

Each case should be assessed on its own merits by someone who is experienced in such matters and qualified to do so. It is imperative that they are consulted at an early stage as bankruptcy is a costly process.

Andrew Bowers

Re10 (Finance) Limited.