Can I declare bankruptcy if a collection agency sues me?

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This article was first published in The Gazetteand the original article can be found online here.

It is important to consider all of your options before opting for bankruptcy. David Pomeroy and Rachel Maddocks of Ashfords explain.

The simple answer to this question is yes, provided you meet the legal requirements.

Since April 6, 2016, the process of filing for bankruptcy has become much simpler. Instead of petitioning the court, you can now file for bankruptcy through the Insolvency Service’s online portal, Online Debt Solutions.

There is no court hearing, as an adjudicator will deal with your claim on paper. They will acknowledge your application and ask the Chief Registrar to register it as a pending action. The adjudicator will then process your request within 28 days (unless a request for additional information is made).

However, it should be noted that although filing for bankruptcy has become much simpler, it is still a formal and legal process that should not be undertaken lightly.

Statutory requirements

The first thing to check is that you meet the legal requirements for a debtor’s application for bankruptcy.

  • Are you definitely unable to repay your debts?

In your application, you will need to provide the arbitrator with details of your assets and liabilities, income and expenses, and you will only be declared bankrupt if it is clear from these details that you are insolvent.

  • Is there a bankruptcy filing currently pending against you?

If this is the case, you will not be able to file for your own bankruptcy. In fact, you wouldn’t want to in this situation because if there is a pending creditor’s request, you can save the costs of making your own request.

  • Does the arbitrator have jurisdiction to declare you bankrupt?

If you live in England and Wales, this requirement is easily met. Alternatively, if you have resided or carried on business in England and Wales at any time during the last three years before the date of your application, the arbitrator will have jurisdiction to declare you bankrupt.

  • Has a bankruptcy order already been issued for the debt you are applying for?

It’s unlikely, but if it is, you won’t be able to file for bankruptcy on that same debt.

What are the benefits of bankruptcy?

Bankruptcy has certain advantages, the most obvious being that debt collectors and creditors will no longer be able to sue you. Your trustee in bankruptcy will take over the administration of your debts, eliminating any stress that may be felt in dealing with claims from many different creditors. The other main benefit is that once you are discharged from bankruptcy, which usually happens automatically after a year, most debts (but not all) are written off.

What are the disadvantages of bankruptcy?

The disadvantages of bankruptcy are numerous. The first is that filing for bankruptcy itself is not a cheap process, as a fee of £680 is payable on application, although this can be paid in instalments. If you are the owner or co-owner of a property, it is very likely that it will be sold. The trustee will also sell any other valuable assets, which could include investments you own, such as insurance policies (but not most pensions). Bankruptcy costs can be high and will also need to be covered by the sale of your assets.

Once discharged, although some debts are discharged, certain types of debt cannot be written off, the most notable being debts to secured creditors. Being discharged also does not mean that you will recover the assets that were not sold, which will continue to be administered by your trustee.

As a bankrupt, you cannot be a corporate director, hold public office or practice certain professions. Bankruptcy is actually a surprisingly public process, as the names of those declared bankrupt are made available on the Insolvency Service website and are published in The Gazette.

You can carry on your activity as a sole proprietor during your bankruptcy, but you will have to carry on your activity under your own name or under the name under which you practiced at the time of your bankruptcy. The only alternative is to disclose to all related parties the fact of your bankruptcy, which is probably unrealistic.

You will also need to disclose your bankrupt status if you want credit over £500, and although you are automatically discharged from bankruptcy after one year, a note of your bankruptcy will remain on your credit file for six years after the date the bankruptcy order was issued, thus affecting your ability to obtain credit for a period of time.

On the balance sheet

Bankruptcy should be a last resort, not the first port of call to manage debt. If you find yourself being sued by a debt collection agency and unable to make payment, you should seek expert advice immediately. Other options are available such as a debt relief order, IVA or negotiating a payment plan.

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