People often use the terms insolvency and bankruptcy interchangeably.
In England and Wales, insolvency and bankruptcy have distinct meanings, although they can often relate to similar circumstances.
Our Insolvency and Restructuring lawyers explain the differences between insolvency and bankruptcy and what legal duties an individual has when a bankruptcy order is made
Insolvency refers to a financial state of being unable to pay your debts and/or your debts exceeding the value of your assets.
Both individuals and companies can become insolvent.
The legal processes which arise differ depending on whether an individual or a company becomes insolvent.
Bankruptcy is one way for individuals (commonly referred to as ‘debtors’) to respond to facing debts that they simply cannot pay or can be a means by which creditors seek to recover debts owing to them from a debtor.
Bankruptcy does not apply to companies or partnerships.
The bankruptcy process ensures that a debtor’s assets are shared amongst that person’s creditors and, with some restrictions, allows the debtor to make a fresh start free from their debts, usually a year after the bankruptcy order is made.
A bankruptcy order can be made in the following circumstances:
When a bankruptcy order is made, the official receiver for the region where the bankrupt is resident, an insolvency practitioner based in the Insolvency Service in England and Wales, usually deals with the early stages of the bankruptcy process.
The official receiver will also be the individual’s trustee in bankruptcy unless an insolvency practitioner is appointed to take over that role.
In bankruptcy, the trustee will realise any assets the debtor owns (over and above any reasonable domestic items and items needed for the debtor’s job) to distribute the money obtained amongst the debtor’s creditors.
There is a statutory order in which creditors have to be paid, which means that secured creditors (for example, a mortgage lender) are paid first, followed by the costs and expenses of the bankruptcy, then preferential debts (for example, monies owed to HMRC) and then finally ordinary unsecured debts.
After that, any debts owed to the debtor’s spouse or civil partner are paid together with any postponed or deferred debts. Any surplus the trustee holds in bankruptcy once all debts and expenses have been paid is returned to the bankrupt.
It is important to note that individuals have certain legal duties when a bankruptcy order is made.
These include:
Certain restrictions apply to individuals who go bankrupt. These include:
Breaking these restrictions can lead to criminal prosecution, as breaching them would constitute a bankruptcy offence.
These restrictions end when the bankruptcy ends or is rescinded or annulled.
These restrictions can also be extended (either by way of an undertaking or court order) if the trustee in bankruptcy believes the bankrupt has acted carelessly or dishonestly.
If you have concerns about your financial position, seek professional advice from a regulated debt adviser.
Depending on the amount of money and assets you have compared to the amount you owe to creditors, bankruptcy may not be the only option.
A debt adviser can advise on whether different options are available to you, such as setting up a Debt Management Plan, an Administration Order or seeking an Individual Voluntary Arrangement with one’s creditors.
You can also get temporary protection for up to 60 days from having to repay your creditors through the Breathing Space scheme.
Please do not hesitate to contact Myerson’s experienced and knowledgeable Insolvency & Restructuring Team if you need assistance or advice relating to bankruptcy issues:
Vicky has over 13 years of experience acting as a Dispute Resolution and Insolvency solicitor. Vicky has specialist expertise in contentious insolvency matters, advising insolvency practitioners, directors in relation to both corporate and personal insolvency issues.
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