Bankruptcy New Bankruptcy Rules have come into force which may enable people with severe debt problems to become debt free much quicker then previously. Bankruptcy may be a better solution than debt management, an IVA or Trust Deed. The key issues are summarised in the below press release from the Insolvency Service:

Bankruptcy

New Bankruptcy Rules have come into force which may enable people with severe debt problems to become debt free much quicker then previously. Bankruptcy may be a better solution than debt management, an IVA or Trust Deed.

The key issues are summarised in the below press release from the Insolvency Service:

31 March 2004

NEW BANKRUPTCY LEGISLATION BRINGS AN END TO THE
ONE-SIZE-FITS-ALL APPROACH

New bankruptcy laws which will encourage enterprise while cracking down on irresponsible and reckless borrowers come into force tomorrow (1st April 2004).

In the biggest shake-up of personal insolvency laws for a generation, the Enterprise Act 2002 marks the end of the one-size-fits-all approach to bankruptcy. It will introduce a fairer regime for those who have failed through no fault of their own, backed up by tough new measures for the minority of bankrupts who take advantage of their creditors and the public.

The Act will:
* provide for the automatic discharge of most bankrupts after a maximum of 12 months;

* introduce Bankruptcy Restriction Orders (BROs) to protect the public and business community from bankrupts whose conduct is reckless, culpable or irresponsible;

* introduce Income Payments Agreements (IPA) - a new way of repaying debts to creditors from the bankrupt's income;

* introduce fast track voluntary arrangements, enabling the bankruptcy order to be annulled in return for increased or speedier returns for creditors;

* remove unnecessary restrictions on bankrupts; and

* limit to three years the period in which a trustee may deal with a bankrupt's home.

Consumer Minister Gerry Sutcliffe said:

"Business is a dynamic process and difficulties and failure are an inevitable part of an enterprise economy.

"However, the fear and consequences of honest failure should not be so disproportionate that they act as a disincentive to entrepreneurs.

>"If we are to build a truly enterprising economy we need an insolvency regime that supports, rather than stifles, the development and growth of new businesses and helps reduce the consequences of failure."

From 1st April 2004, a bankrupt will be automatically discharged from bankruptcy after one year rather than after two or three years as happens currently. A bankrupt may be discharged earlier than one year if the Official Receiver's investigation is concluded before then or is not needed.

However, the principle of 'can pay, will pay' still applies. A bankrupt will still:

* risk losing their home and possessions, which will be sold to pay outstanding debts;

* face severe restrictions on their finances, such as getting a mortgage, bank account or future credit;

* have their bankruptcy advertised and recorded on a public register that anyone can search;

* make ongoing payments to creditors where possible; and

* face prosecution if they are found to be dishonest.

In most cases, bankrupts will have to make payments to creditors from their income for three years. Currently a court order is needed to arrange such payments, but under the new rules, a system of income payment agreements (IPAs) will make it much easier for bankrupts to make such payments.

The Enterprise Act also introduces Bankruptcy Restriction Orders as a way of dealing with bankrupts who are dishonest, reckless or blameworthy. BROs will cover a wide variety of conduct. They will last between two and 15 years and impose restrictions on obtaining credit of more than £500 without disclosing status, trading in a name/style other than the one in which the bankruptcy order was made and acting as a director. Breach of an order will be a criminal offence.

Mr Sutcliffe said:

"Bankruptcy is not, and never will be an easy option. Bankruptcy will always be tough, but it will now be particularly tough for those whose conduct is unacceptable.

"Unfortunately there is a small minority of bankrupts from whom the public needs protecting. Under the Enterprise Act we have to power to put these people out of business for a long time."

Notes to editors

1. In the UK 31.5 per cent of people say that fear of failure would prevent them from starting a business. In the US that level is 21 per cent (from Global Entrepreneurship Monitor 2001 Executive Report).

2. Actions that could be considered to be dishonest or blameworthy and contribute towards a bankruptcy restriction order include:

failing to keep or produce records that would explain a loss of money or property; giving away assets or selling them at less than their value; deliberately paying off some creditors in preference to others; failing to supply goods or services that have been paid for; carrying on a business while unable to repay debts; incurring debts with no reasonable expectation of repaying them; gambling, rash speculations or being unreasonably extravagant; causing debts to increase by neglecting business affairs; fraud or fraudulent breach of trust; not co-operating with the Official Receiver or trustee.

3. The changes to bankruptcy discharge will mean that after 1 April those made bankrupt will generally receive their discharge one year after the date of the bankruptcy order. A bankrupt will not be discharged if there is a court order suspending his or her discharge. (These orders are generally made where the bankrupt has not co-operated with the Official Receiver or trustee in bankruptcy.)

4. In some cases the bankruptcy discharge period will be less than one year. This will only occur:

* where a bankrupt has fully co-operated with the Official Receiver and/or trustee;

* where creditors have not raised any matters relating to the bankrupt's conduct and affairs which require further investigation; and

* where the Official Receiver has filed a notice at the court stating that the investigation of the bankrupt's affairs has been concluded or s/he thinks an investigation is unnecessary.

5. Individual Voluntary Arrangements (IVAs) are an alternative to bankruptcy, without the same automatic restrictions, where the debtor comes to an arrangement with his or her creditors about the repayment of his or her debts. Currently, of the 7000 or so IVAs a year, only about 2% are post bankruptcy. By introducing post bankruptcy 'fast track' individual voluntary arrangements, the aim is to increase the number of post bankruptcy IVAs to enable more people to 'escape' from bankruptcy and to provide a better return to creditors.

6. The Enterprise Act introduces a new fast-track regime for post-bankruptcy IVAs where the Official Receiver is the proposed nominee. Under this regime, the proposal will be agreed with the Official Receiver and filed with the court. No meeting of the creditors will be called and it will not be possible to modify theproposal. The Official Receiver will send out the proposal to thecreditorsona 'take it or leave it' basis and the creditors will either agree to or disagree with the proposal by correspondence. If the IVA is approved, the Official Receiver becomes supervisor and will notify the court which can then annul the bankruptcy order.

7. The current Income Payment Order (IPO) regime is designed to ensure bankrupts make an affordable contribution towards their debt. Generally they last for just under three years, and in most cases they cease on discharge from bankruptcy. The Enterprise Act sets out that IPOs will in future last for 3 years from the date of the IPO. The link between a bankrupt's discharge and the duration of an IPO has been broken - otherwise creditors would lose out given that the majority of bankrupts will now be discharged within 1 year.

8. IPOs are made by the courts on the application of the trustee in bankruptcy and generally they are not contested. IPOs can be varied if the trustee or the bankrupt applies to the court.

9. Income Payment Agreements (IPAs) establish a legally binding written agreement between the bankrupt and the Official Receiver or trustee. An IPA requires the bankrupt (or a third party) to make specified payments to his or her trustee for a specified period. This will be enforceable in the same way as an IPO made by the court. An IPA must specify the period in which it is to have effect and that period can apply after a bankrupt is discharged but cannot extend to a date more than three years after the date of the IPA. As with income payments orders, and IPA will extend post discharge. An IPA may be varied in writing.

10. Unnecessary restrictions placed on undischarged bankrupts will be removed (for example membership of a regional flood defence committee is currently prohibited).

11. The Enterprise Act received Royal Assent on 7 November 2002. It covers a range of measures to enhance enterprise through strengthening the UK's competition law framework, transforming the approach to bankruptcy and corporate rescue, and empowering consumers. Information on the Enterprise Act, including the content of the regulations needed to implement the consumer and competition provisions can be obtained at http://www.dti.gov.uk/enterpriseact

12. Further information on the personal insolvency provisions of the Enterprise Act is available at http://www.insolvency.gov.uk/

Department of Trade and Industry

7th Floor
1 Victoria Street
London SW1H 0ET
Public Enquiries +44 (0)20 7215 5000
Textphone +44 (0)20 7215 6740
(for those with hearing impairment)
www.dti.gov.uk

If you require further information The Insolvency Service have issued the following bankruptcy guidance:

download Guide to Bankruptcy.pdf (please be patient, this may take a few moments)