When people consider the prospect of bankruptcy, there are numerous factors that may put them off taking the plunge, and one of the main ones is the thought of losing everything they have. It’s a natural fear to hold, a fear that everything they have built up over their life will be cruelly taken away, and none more so than the biggest asset of all – a person’s home.
It's important to understand though that bankruptcy does not necessarily mean the loss of every worldly possession - far from it. The process is not there to humiliate or punish those who require it, but to deal with a problem, and the law ensures that those who choose bankruptcy still retain anything needed to maintain a respectable standard of living.
It might seem like an obvious question, but what do we mean by assets? Well the answer is obvious really - it’s anything a debtor owns, from money, property, vehicles, policies, jewellery, physical items, and shares. The important thing to note though is that not all assets are “seizable”.
The law states that assets classed as essential items can normally be kept by debtors. By essential, we mean such things required to get by each day, such as clothing, the furniture in your house, cooking equipment, educational items, toys and tools if required for a trade (though only up to a value of £1000). Refrigerators, washing machines and microwave ovens would come under this criteria. Other items include cleaning materials, anything that adds to the safety of a property, some IT equipment, lights and fittings, floor coverings and more. No one will visit your property to construct an inventory of your belongings, and your partner’s possessions and children’s toys are not at risk.
It may also surprise many that another item that it is possible to keep is a motor vehicle, though there are certain conditions to be met for this to happen. As with any asset, it depends on the interpretation of the relevant law, and the need for the vehicle – the law states an asset can be kept that is “necessary to the bankrupt for use personally by him in his employment, business or vocation.”
However, case studies show that the value of the vehicle is important here. A vehicle can only be kept if it is considered of “reasonable value”. In other words, if a bankruptcy claimant needs a car, and that is agreed upon, but has an expensive vehicle, he or she will most likely have to sell the vehicle and purchase something of lower value that is still acceptable for their daily needs. If this reasonable value is disputed, the court may well decide the figure. The truth is, this is a consideration that applies to all assets – even if needed, they have to be of reasonable value, otherwise they may have to be sold and re-bought for a lower amount – not surprisingly, such items are called unreasonable assets. All these things are hard to quantify though, as they are decided on a case-by-case basis.
So who decides all this? This is where the trustee comes in, the person who administers a bankruptcy. He collates and collects all the debtor’s assets and sells them to help pay off debts and also to pay for the bankruptcy process. This person will usually be the Official Receiver who is administering your bankruptcy or alternatively, a licensed insolvency practitioner. When a bankruptcy order is made, your bank and building society accounts will be seized by the trustee. Accounts will be frozen, but trustees can release money for essential living costs or money for partners tied up in joint accounts. If an account is in credit, that balance becomes an asset. It should be noted however that only assets that should raise £500 or more are usually considered worth seizing.
Bankruptcy proceedings are fluid, and circumstances can change during the process. It’s important to be aware that if circumstances change for an individual during proceedings, then you must inform the trustee about this. If during proceedings an individual receives an inheritance for example, or receives extra funds, it would be an offence not to inform their trustee, in the same way it would be to not reveal all your assets initially when filing for bankruptcy or undervaluing (and then selling) assets. Such concealment could lead to a large fine or even imprisonment. It may lengthen the bankruptcy process too and lead to a bankruptcy restriction order, in which you will be subject to certain restrictions for the period stated in the order. This can be from 2 to 15 years. A trustee also has the power to recover sold assets if he thinks they have been sold off on the cheap – for example selling a property at under market value to a relative – he can overturn transactions up to five years in the past. However, it is possible to sell a property at below market value if you convince the trustee it is worthwhile doing this, namely because it means a quick sale, fewer costs (solicitors fees etc.) and is thus beneficial to the bankruptcy case.
There is one asset that counts more than anything though, and that is a property, and the thought of losing the roof over their head puts many off the prospect of bankruptcy. I’d like to reassure you by saying not to worry, but a house is a prime asset to be seized to help pay off debts, but yet again it isn’t that simple, and depends on numerous factors.
The first factor to consider is the equity on the property. This is the amount an individual would be entitled to should the property be sold (or its greater value compared to outstanding mortgage after payments and partners’ shares etc.). If this amount can help pay off debts, then it may be sold for this purpose. This sounds daunting and is a big down-side to bankruptcy, but it should be noted that such sales are not necessarily instant, and can be put off for a year (on request) so that alternative accommodation can be found, usually if you have a partner and/or children. In exceptional circumstances, a property may not be sold. The only other way to avoid having to move is if a joint owner of a property buys out the share of the bankrupt individual. This is especially helpful if there is little or no equity in the property.
Another huge fear is a person’s pension. However, if the Inland Revenue have approved your pension, then the trustee should not be able to touch it. However, if pension payments are already being received by an individual before the date of discharge, they can be used in calculating income payments agreements or income payments orders (where surplus income is added to the bankruptcy estate). A life assurance policy is a different matter – this is something the trustee is far more likely to claim off you. Finally, if you are owed money, this is considered an asset, and an attempt will be made to recover funds. If the costs of doing this outweigh the value of the debt itself, then it may be written off.
There is one other issue to consider. If bankruptcy looms for you, if it is inevitable, there is the chance for you to take matters into your own hands. By this, I mean sell the assets yourself, and try and get a better price than you’d expect the trustee to get when he puts them up for public auction. If you can make more money it makes obvious sense, and there is always the small possibility you will raise enough to avoid bankruptcy altogether.
The bankruptcy process is a complex one, and every case is unique. There are no set rules about what the person who controls each case will look to do to deal with the debts and money owed to creditors. What’s important to understand though is that the process is not set up to strip you of every worldly possession. Sacrifices will have to be made, but anyone considering bankruptcy or even one of the alternatives such as a debt relief order (DRO), debt management plan (DMP) or an individual voluntary arrangement (IVA) should already be aware of this already and prepared for such an eventuality. The only other advice I can give is to face the problem head-on, seek advice, and consider all the options. In the long-run, you will not regret it.