Much play has been made of the rise in the number of individual insolvencies, whether it’s people being created bankrupt by their creditors or declaring themselves to be bankrupt. In this, the first of two articles, I shall be looking at some of the issues surrounding the impact of being made bankrupt.
But to start, let’s remind ourselves of the data, published each quarter by the Department of Trade and Industry (DTI). This data shows a worrying trend-line.
While Individual Voluntary Arrangements (IVAs) in 2005 rose at a faster rate than bankruptcies, it’s bankruptcies that I particularly want to examine. In the last quarter of 2005, there were 13,501 bankruptcies. This represented an increase of 11 per cent on the third quarter of 2005 and an increase of 38 per cent on the last quarter of 2004. Bankruptcies during the whole of 2005 totalled over 47,000, an increase on 2004 of 31 per cent.
A bankruptcy order is made on the petition of the debtor or one of his creditors when the court is satisfied that there is no prospect of the debt being paid. There are two types of bankruptcy. Debtor bankruptcy is where the individual has declared themselves bankrupt. There are usually few or no assets to cover the debts outstanding and, therefore, in the eyes of the court, no prospect of the debts being paid.
Creditor bankruptcy is where an individual is made bankrupt through the petition of a company to which the individual owes money. In the case of a credit card company, for example, the company has to prove to the court that the money is owed. But in the case of national and local governmental bodies, it is enough to show that the money has been demanded. So for unpaid income tax, National Insurance, value added tax (VAT), or council tax, an individual could find that they are the subject of a bankruptcy order, even when they think that a negotiation is still continuing.
Key issues
There are two key issues that a bankrupt faces on the day the bankruptcy order is made. Firstly, it is not just the debt in dispute that becomes due, it is all the individual’s debts. So even though the repayments on cards and loans may be up-to-date, the balances are now liable to be repaid in full. Secondly, all the individual’s assets are frozen, including their bank accounts, with the result that the individual cannot access any equity to pay off the debt in dispute and reverse the bankruptcy order.
All bankrupts find the process of bankruptcy an embarrassing, even shattering, experience as their lifestyle is examined in detail, but for the creditor bankrupts it can seem particularly painful, especially if they have enough equity available in their property to cover the debt in dispute. But it gets worse because not only are they now liable to pay off all debts, but costs start to mount as the bankruptcy process unfolds.
Problems upon problems
The official receiver takes control of the bankrupt’s assets and arranges a creditors meeting, at which a trustee in bankruptcy is appointed, normally an insolvency practitioner. These are specialists in private practice who are often members of an accountancy firm but who can also be part of a dedicated insolvency practice.
What the official receiver receives in fees is laid down in the rules and at £1,625 doesn’t sound excessive. Unfortunately that’s only the tip of the iceberg. First off, the trustee has to pay all the proceeds from asset sales into an official insolvency service account, and the government takes 17 per cent of that by way of an ad valorem tax. Next, there’s no cap on the fees an insolvency practitioner can charge and fees around the 20 per cent mark are fairly typical. This is plus VAT, of course, so that’s another 17.5 per cent of that 20 per cent. And when it comes to arranging any disbursements, a fee typically of 10 per cent is charged on each disbursement, including, naturally, 10 per cent of the 20 per cent they’re extracting for doing the work, plus the inevitable VAT.
So for the bankrupt individual, problems are piled upon problems, as fees are piled upon fees. The total indebtedness has doubled, in some cases more than doubled, as the bankruptcy fees have risen. Furthermore, the trustee will want to force the home to be sold, because he only has three years under the ‘use it or lose it’ rules in the Enterprise Act 2002 to realise the asset and grab his share, and the sale, of course, attracts estate agent, legal and associated costs – with a forced sale potentially delivering a lower return than the full market value.
The new rules may allow for a bankrupt to be discharged after only one year, but what a year of misery and pain. In my second article, I’ll look at how some of that misery and pain can be dissipated.
Wayne Smethurst is director of Glow Mortgages
