Partner at Morecrofts, and insolvency specialist Donal Bannon explains what bankruptcy is and how it works.
What is bankruptcy?
Bankruptcy is a legal status or recognition of an individual’s insolvency. It arises when a person is unable to pay their debts and applies for the legal protection that a bankruptcy order offers or because someone to whom they owe money (a creditor) applies for a bankruptcy order.
When the order is made the insolvent person becomes a bankrupt and his/her creditors may no longer pursue them for the debts which they owe. Instead an insolvency practitioner is appointed who is called a Trustee in bankruptcy.
The Trustee’s role is to identify and realise the assets of the bankrupt and use such monies to pay the creditors some or all of the monies they are owed. Any inheritances or lottery wins received during bankruptcy could be taken by the Trustee.
What is the bankruptcy process?
The application to have oneself made bankrupt is made online. As part of the application all things that the bankrupt owns (assets) and his debts must be provided. When the order is made and the Trustee is appointed he will examine the information provided by the bankrupt and may have a meeting with the bankrupt to discuss the financial information in a more detailed way.
The Trustee will investigate what assets the bankrupt owns and will look to sell them; this may include any interest that a bankrupt may have in property such as the family home. He may ascertain whether the bankrupt has surplus income which could paid to the Trustee or whether there are any claims which could be made against the bankrupt or others to enhance the realisations available to creditors such as preference or transaction at undervalue claims. Preference claims arise when the bankrupt has chosen to pay some creditors but not others.
Transaction at an undervalue claims arise when the bankrupt has sold an asset for less than it is worth.
Speak to an expert solicitor before and after bankruptcy
Anyone thinking of making themselves bankrupt should take legal advice before doing so. It is important to ensure that the risks of any claim being made against the bankrupt by his Trustee can be avoided. Failing to do so can render the bankrupt liable to substantial claims and put the family home at risk. Bankruptcy has serious consequences making it more difficult to obtain credit, prevents the bankrupt from being involved in the management of a company and for some professionals can lead to disciplinary measures.
Should claims be brought during the bankruptcy period (one year if full co-operation is given to the Trustee) then expert legal assistance should be sought to investigate the merits of the claims and negotiate a settlement of such claims. This will inevitably save substantial costs and reduce the amount of any claim.
Find out more about Donal Bannon and how he can help you here