Consequences of Bankruptcy & Recovery of Assets

I have set out below what I hope is useful and helpful detailed information if you or your partner have been made bankrupt. 

Once a Bankruptcy Order has been made the bulk of the property and assets belonging to the bankrupt automatically vest in their Trustee in Bankruptcy.  This is referred to as the bankrupt's estate.   Not only does this include all property belonging to the bankrupt at the commencement of the bankruptcy but it also includes any property which the bankrupt acquires during the time that he is bankrupt.  This is referred to as after acquired property.  There are some exceptions to this as a bankrupt is normally allowed to keep the tools, books, vehicles and other equipment which is needed for him personally to carry out his employment or business.  These are generally referred to as the "tools of the trade”.  In addition, the bankrupt's personal belongings,  such as clothing, bedding, furniture and household equipment needed by the bankrupt and his family,  are exempt but only those items which satisfy basic domestic needs so whilst the bankrupt may be able to retain the beds, table and chairs, he will not be able to retain his collection of first edition books or the impressionist masterpiece inherited from his eccentric great uncle!  The other exception is property which the bankrupt holds on trust for any other person. 

Following the making of a Bankruptcy Order the bankrupt will be contacted by the Official Receiver who will require him to give up details of all assets and any relevant books and papers relating to those.  Failure to cooperate with the Official Receiver and/or the Trustee in Bankruptcy is a contempt of Court but, perhaps more significantly, is likely to result in an application being made to suspend the automatic discharge which would normally apply after 12 months.

Once a Bankruptcy Order has been made the bankrupt may no longer act as a director or directly, or indirectly, form, control or manage a company without the permission of the Court.  The bankrupt will also not be able to borrow more than £500 without telling the lender of the bankruptcy and the bankrupt may also be barred from carrying out certain sorts of work.  In addition, whilst it may not be unlawful for a bankrupt to carry out certain types of work, they may find that their employer is not happy to continue employing them because of their bankruptcy.  If a bankrupt breaches any of the restrictions set out above, then it is a criminal offence and, again, is likely to delay discharge from bankruptcy.

The thing that concerns most bankrupts is whether or not they will lose their home following the making of a Bankruptcy Order.  Obviously every case is different and so it is not possible to give a definitive answer to that question.  Generally speaking it is the duty of the Trustee to realise the bankrupt's assets for the benefit of creditors and that will normally include the bankrupt's home, even if that home is owned jointly with other people and whether it is the family home.  A Trustee normally has 3 years from the making of the Bankruptcy Order to decide if he will take action to recover the family home, after which he may lose the right to do so.  It is usually the case that if the Trustee wants to sell the family home, he is unlikely to get  a Possession Order within 1 year of the Bankruptcy Order, thus giving the bankrupt and the bankrupt's family, time to readjust and to make arrangements to find somewhere else to live.

The Trustee may decide that he does not wish to make a claim in respect of the family home.  This would usually be if there were no equity in the property, or if the property had been specially adapted for a member of the family, so it may be possible to persuade a Trustee not to pursue a claim in respect of the family home.  However, this is a very complex area and every case must be looked at on an individual basis.  Although it is undoubtedly the case that the making of a Possession Order can cause hardship to the bankrupt's family, the Trustee's duty is to the creditors and he must pursue a claim for the home if it is in the creditors' interests to do so.  If that is the case, then it is usually in everyone's best interests to work together to achieve the best possible price for the property if it has to be sold and to negotiate with the Trustee if it is thought that it would be possible to purchase the Trustee's interest without the property having to be sold.  We have extensive experience of dealing with these sorts of issues and it is important to deal with this as soon as possible rather than allowing time to go by in the hope that the Trustee will forget that he has a claim against the property, he won't and that will simply leave the bankrupt and his family with very little time to put forward alternatives to a Possession Order and a forced sale!

It is particularly important that these issues are tackled early on when the property is in the sole name of the bankrupt, although the bankrupt's spouse, or partner,  believes that they have an interest in the property, or when there is debt secured on the property which was used to support the bankrupt's business rather than being a joint debt.  It may take some time to gather together evidence to support a claim made by a spouse, or partner, in these circumstances. 

Sometimes a Trustee will claim that a bankrupt has tried to defeat the claims of creditors by disposing of assets prior to the bankruptcy or by paying off certain creditors in preference to others.  There are a number of statutory provisions that a Trustee can rely on to enable him to set aside these transactions but sometimes it is not so straight forward and there may be good reasons why a transfer of property has occurred and it may be possible to defeat such claims by a Trustee.  These can often involve detailed investigation of the circumstances surrounding what appears to be a simple gift.  Again, this can be a complicated area requiring a detailed knowledge of the statutory provisions available to a Trustee and swift decisions may need to be made to avoid expensive legal costs.