The terms insolvency and bankruptcy are often used together, although they have different meanings and different implications. We take a look at what they are and how to manage each of them.
What is Bankruptcy?
Bankruptcy occurs when an individual cannot pay what they owe. You can declare yourself bankrupt or a creditor can apply for a bankruptcy order if you owe them £5,000 or more.
If you have entered into an individual voluntary arrangement to pay your debts in regular instalments to an insolvency practitioner but you have breached the terms of the arrangement, the insolvency practitioner can make you bankrupt.
When a Bankruptcy Order is Made Against You
After the bankruptcy order has been made, you will need to provide the official receiver with full details of your assets and finances. The official receiver is someone who is appointed by the court and who works for the Insolvency Service.
The official receiver will meet with you, either in person or by telephone. They will go over your finances with you and you can ask them questions about the bankruptcy process. After the meeting, they will send details of your finances to your creditors.
An insolvency practitioner will be appointed to sell your assets. The proceeds will be used firstly to pay for the bankruptcy process and to pay any employees you may have had and then to pay your creditors.
If you own a property, this can be sold if needed to pay off your creditors. Alternatively, the insolvency practitioner may place a restriction against the title so that in the future when it is sold, they will be able to recover the money owed.
Advantages of Bankruptcy
Dealing with financial problems can be stressful and if things have been difficult for a while, bankruptcy may come as something of a relief as you will no longer have to deal with your creditors. Someone else will take charge of dealing with them, meaning you will not have to face phone calls, emails and other communications.
Bankruptcy can also prevent legal action in respect of unsecured debt.
You will generally be allowed to keep your household goods, including clothing and furniture, as well as items needed for work.
Bankruptcy usually lasts for a year, after which you will generally be discharged and you will no longer be liable for any debts covered by the bankruptcy order, although you will still need to make payments if you have made an income payments agreement. The official receiver has three years in which to take steps to recover money from your share in a property. This could be by securing a charging order or receiving the sale proceeds if you sell your share of the property to someone.
You will also usually be free from the restrictions imposed on you during the bankruptcy period after one year.
When to Apply for Bankruptcy
You may want to take professional advice before applying for bankruptcy as it will impact your life quite substantially as well as affect certain aspects of it for the future, such as your credit score.
Our expert bankruptcy solicitors can advise you of the options open to you and assess whether it would be in your best interests to apply for bankruptcy.
If you are unable to pay your debts, bankruptcy may be the best solution. However, there may be alternatives that you could consider and it is important to make sure that you have independent legal advice before you take action.
What is Insolvency?
Insolvency is when a company’s or an individual’s liabilities exceed their assets.
For companies, there are two types of insolvency:
- Cash flow insolvency, when although assets exceed liabilities, there is insufficient cash available to pay debts that are due. There are options to deal with this type of insolvency, such as entering into a voluntary agreement with creditors so that you pay them a reduced amount until cash flow improves
- Balance sheet insolvency, where the company’s debts exceed its assets. There may still be ways to rescue a company, and you should consider speaking to an insolvency expert about the potential options
How Does Insolvency Differ from Bankruptcy?
Insolvency is a financial situation, while bankruptcy is a legal process. Bankruptcy cannot apply to businesses, only to individuals or sole traders.
Bankruptcy means that someone else will take control of the situation, sell assets and clear what debts can be cleared.
Insolvency means that you need to start making decisions about what to do next to deal with the situation. Options including:
- Contacting creditors to see if they will enter into an informal agreement
- Entering into a company voluntary arrangement
- Putting your company into administration, following which it could be sold or be rescued in some way, for example, by restructuring
- Liquidating or winding up the company
How to Prevent Bankruptcy and Insolvency
The first crucial point is to communicate with those to whom money is owed. Avoiding creditors could result in them taking legal action against you or your business.
They may be prepared to agree a repayment plan with you that you can afford. This could be an attractive option to them, as they will receive their money without having to go to the trouble of starting legal proceedings.
You are strongly advised to speak to a bankruptcy and insolvency expert as soon as you can. At Witan Solicitors, we have wide experience in dealing with financial difficulties for individuals and businesses across a range of sectors. We can work with you to establish what options are available to you and advise you on the best course of action to protect your position as far as possible.
There are often alternatives to winding up a business or entering into bankruptcy and we will identify these and go through the advantages and disadvantages of each with you so that you have a clear idea of the implications of any action you decide to take.
Our clients often find that going through everything with an experienced insolvency and bankruptcy solicitor is reassuring and helpful and that difficulties become far more manageable after they speak to us.
Contact Our Insolvency and Bankruptcy Solicitors
If you would like to talk to one of our expert insolvency and bankruptcy lawyers, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help.
