Consequences of Bankruptcy & Recovery of Assets

If you or your partner have been made bankrupt, you are probably wondering what happens next. What can you keep? What will be taken? How does this affect your home, bank account, or pension? Here, the experts at Clough & Willis have put together this overview to help you understand the potential impacts a bankruptcy can have on your life and finances - and what you can do next.

What happens when a bankruptcy order is made?

When a bankruptcy order is issued, most of a bankrupt individual's assets automatically transfer to the Trustee in Bankruptcy. This is the insolvency practitioner or official receiver who will manage a bankrupt person's assets and pay their creditors. The bankruptcy estate, as it will then be known, includes property and assets owned at the time of bankruptcy, as well as any assets acquired during bankruptcy, which are referred to as after-acquired property.

There are exceptions to this rule. A bankrupt person is typically allowed to keep essential items required for work, such as tools, books or vehicles, commonly referred to as tools of the trade. Basic household necessities like clothing, bedding and furniture that meet domestic needs are also protected. However, luxury items - such as valuable artwork or rare book collections - are not exempt and may be claimed by the Trustee.

Responsibilities after bankruptcy

After a bankruptcy order is issued, a bankrupt person is required to cooperate with the official receiver by providing full disclosure of all assets, as well as relevant financial records. They must tell the official receiver about any changes, such as a lump sum payment or newly acquired property. Failure to comply may result in serious consequences, including contempt of court and an extension of the bankruptcy period beyond the standard 12 months.

Restrictions following bankruptcy

There are several legal and financial issues a bankrupt person, or anyone who shares assets or joint accounts with a bankrupt person, should keep in mind:

• You can no longer act as a company director or manage a business without court permission.
• You must disclose your bankruptcy when applying for credit over £500. This means you may struggle to borrow money, as lenders will see the bankruptcy on your credit report.
• You may be barred from certain professions, depending on industry regulations.
• Joint accounts could be affected, with creditors pursuing the other account holder for any outstanding debt.
• Some pension schemes may not be protected, depending on the type of scheme and whether the pension fund can be claimed as an asset.

You should always seek legal advice to give you a clear understanding of what your responsibilities are when it comes to handling a bankruptcy. In some cases, ignoring restrictions can lead to a criminal record, serious financial consequences and an extension of your bankruptcy period further.

Can a Trustee challenge past transactions?

A Trustee has the power to challenge financial transactions made before bankruptcy if they suspect the bankrupt person attempted to protect assets or favour certain creditors over others. This includes:

• Transferring property to a family member before bankruptcy.
• Repaying one creditor ahead of others.

However, these cases are not always straightforward. If there is a legitimate reason for a transaction, it may be possible to challenge the Trustee’s claim. Such disputes require in-depth analysis of financial records and an understanding of insolvency laws to determine the best course of action.

What happens to a bankrupt person's home?

The biggest worry for most of the clients we work with is usually what will happen to their home during insolvency.

The Trustee in Bankruptcy has a duty to realise assets for creditors, which usually includes the bankrupt person’s home - even if it is jointly owned or a family residence. They have up to three years to decide whether to take action regarding the family home. If they intend to sell the property, they will usually wait at least 12 months before seeking a possession order, giving the bankrupt person and their family time to make alternative arrangements. This also means that mortgage payments may continue to be an issue during this period.

In some cases, the Trustee may decide not to claim the home, particularly if:

• There is no equity in the property.
• The home has been specially adapted for a disabled family member.

Each case is assessed individually. If the Trustee does decide to claim the property, it may be possible to negotiate a buyout of the Trustee’s interest instead of a forced sale. If a property has to be sold, it is usually in everyone's best interests to work together to achieve the best possible price.

The issue becomes more complex when:

• The property is in the bankrupt’s sole name, but their spouse or partner believes they have a financial interest in it.
• Secured debts were taken out to fund the bankrupt person’s business, rather than for joint purposes.
• The property was acquired through a security deposit.

What is possible will depend on the specifics of your case, but it's always important to act quickly in these situations, as delays can reduce the options available to you. This is an area we have extensive experience in - so please get in touch.​​​​​