Bankruptcy - Commons Library Standard Note

Published 05 February 2015 | Standard notes SN07097

Authors: Lorraine Conway

Topic: Insolvency

Bankruptcy procedures are determined by provisions of the Insolvency Act 1986 (as amended), the Insolvency Rules 1986 (as amended), and the Enterprise Act 2002 (as amended).

When an individual is in financial difficulties and cannot pay their debts “as and when they fall due”, they may be made bankrupt (there are alternatives to bankruptcy such as informal agreements, Individual Voluntary Arrangements and Debt Relief Orders). A company cannot be made bankrupt, only individuals can. The correct insolvency term and procedure for a company is liquidation.

A bankruptcy petition may be presented to the court either by the debtor himself (a debtor’s petition) or by one or more creditors who are currently owed £750 or more by the debtor and that amount is unsecured (a creditors’ petition). Once a bankruptcy order is made by the court, an official receiver will be appointed trustee in bankruptcy (unless a private sector insolvency practitioner is appointed). As at the date of the order, the bankrupt’s estate vests in the trustee. The bankrupt’s estate essentially consists of all the property which belongs to or is vested in the bankrupt at the commencement of his/her bankruptcy. The function of the trustee is to collect in and sell the bankrupt's assets and to make payments to the creditors. The trustee's professional costs are paid out of the bankrupt's estate. Automatic discharge from bankruptcy usually occurs after one year. Following discharge, the bankrupt is no longer liable for the balance of his/her debts.

In August 2014 the Government called for evidence in order to review the creditor petition limit for bankruptcy, which was set at £750 in 1986. The Government asked whether this figure should be increased and, if so, to what level. On 15 January 2015, the Government announced that the creditor petition level would be raised from £750 to £5,000 with effect from 1 October 2015.

This note provides a brief outline of bankruptcy procedures. It should be emphasised, however, that anyone made bankrupt (or considering bankruptcy) should seek proper legal advice based on a full appraisal of the facts of their case.

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