Personal insolvency terms

This is a summary of the main insolvency terms so far as they relate to personal insolvencies:

Annulment

Cancellation.

Assets

Anything that belongs to the debtor.  Certain assets are ‘excluded’ from the bankruptcy: the bankrupt will be able to keep the following items unless their individual value is more than the cost of a reasonable replacement:

• Tools, books, vehicles and other items of equipment which are needed for use personally in his employment, business or vocation;
• Clothing, bedding, furniture, household equipment and other normal items needed in the home.

The official receiver/trustee will sell all other assets on the making of the bankruptcy order, using the money generated to pay the fees, costs and expenses of the bankruptcy and creditors.

Bankrupt

A person against whom a bankruptcy order has been made.

Bankruptcy order

A court makes a bankruptcy order only after a bankruptcy petition has been presented. It is usually presented by either the debtor him or one or more of his creditors owed at least £750 by the debtor and the amount is unsecured.

Bankruptcy is one way of dealing with debts that cannot be paid. The bankruptcy proceedings:

• free a person from overwhelming debts so that they can make a fresh start, subject to some restrictions, and
• make sure that their assets are shared out fairly among their creditors.

Bankruptcy restriction order or undertaking

A procedure whereby a bankrupt who has been dishonest or in some other way to blame for their bankruptcy may have a court order made against them (‘BRO’) or give an undertaking to the Secretary of State (‘BRU’) which will mean that bankruptcy restrictions continue to apply after discharge from the bankruptcy for a period of between two and fifteen years.  BROs and BRUs are quite rare.

Charge

Security interest taken over property by a creditor to protect against non-payment of a debt (such as a mortgage).

Company Directors Disqualification Act 1986

An Act of Parliament about the disqualification of directors.  Also prevents undischarged bankrupts from acting as directors.

Creditor

Someone owed money by a bankrupt.

Secured creditor

A creditor who has a claim over something belonging to a bankrupt, typically a mortgage or charge over their home.

Unsecured creditor

A creditor who does not hold security for money they are owed.

Dividend

Any sum distributed to preferential or unsecured creditors in an insolvency.

Estate

A bankrupt’s property which the Official Receiver / trustee has the legal right to deal with.

Fixed charge

A charge held over specific assets. The debtor cannot sell the assets without the consent of the secured creditor or repaying the amount secured by the charge.

Income payments order or agreement

A bankrupt may be ordered by the court (‘IPO’) or may enter into an agreement with his trustee (IPA’) to pay a certain amount of his income over to the trustee for a period of three years. This agreement will stay in place even after the person is discharged from bankruptcy.  The bankrupt must be left with sufficient cash to meet the ‘reasonable domestic needs’ of himself and family. If a person’s income changes then the agreement may be varied.  About one in 5 bankrupts have an IPO or IPO, that is to say 4 out of 5 bankrupts don’t.

Insolvency practitioner

An authorised person who specialises in insolvency, usually an accountant.

Official Receiver

The official receiver is an officer of the court and a civil servant employed by the Insolvency Service. The official receiver is responsible for administering bankruptcies and protecting assets from the date of the bankruptcy order.  He or she will also act as trustee of a bankruptcy estate unless an insolvency practitioner is appointed.

The official receiver is also responsible for looking into the financial affairs of each bankrupt for the period before and during the bankruptcy. He may report to court and has to report to the creditors of a case. The official receiver must also report any matters that indicate a criminal offence has been committed in connection with the bankruptcy or that the behaviour of the bankrupt has been dishonest or in some way to blame for the bankruptcy.

Petition

A formal application made to a court.

Realise

Realising an asset means selling it or disposing of it to raise money, for example to sell an insolvent’s assets and obtain the proceeds.

Release

When the Secretary of State agrees that the trustee has completed the administration of a case.

Restrictions on a bankrupt

The following are criminal offences for an undischarged bankrupt:

• obtaining credit of £500 or more either alone or jointly with another person without disclosing their bankruptcy;
• carrying on business in a different name from that in which they were made bankrupt, without telling those with whom they are doing business the name in which they went bankrupt;
• being concerned in promoting, forming or managing a limited company or acting as a company director without the court’s permission (the chances of a bankrupt getting approval to act as a director are very slim indeed).

Secretary of State

The Secretary of State for the Department of Trade and Industry.

Statement of affairs

A document sworn under oath, completed by a bankrupt stating the assets and giving details of debts and creditors.

Trustee

The trustee in bankruptcy is either an official receiver or an insolvency practitioner who takes control of the assets. The trustee’s main duties are to sell these assets and share the money out amongst the creditors.