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In recent weeks, bankruptcy has come back to the top of the agenda, with widespread media reports on Sean FizPatrick’s bankruptcy in the Republic on 12 July, and the release of statistics for the second quarter of 2010 showing a further increase in personal insolvency in Northern Ireland in the last three months with a 15% increase in Bankruptcy Orders, compared to the first 3 months of this year(Source Insolvency Service NI)

In this week’s business report, Sean Cavanagh of Cavanagh Kelly discusses the bankruptcy process, the personal implications of being adjudicated bankrupt and points out why, in some cases, it may not be all over in 12 months!.

Personal financial hardship continues to be a very difficult (and often taboo) issue. In today’s world, it is, however, a reality; but with the right advice at the right time, those in debt can find a way out of their difficulties and start afresh.

One of the ways to start afresh is by going bankrupt. Whilst this may seem to be the nuclear option, for many it allows old debt to be cut away, and the individual to get back on the road to financial stability. Last year in Northern Ireland, more than 1,200 individuals went bankrupt – over 100 per month!

Prior to being adjudicated bankrupt, you will have owed the tax man, a supplier or service provider more than £750, you will have been unable to pay your debts and the supplier/provider will either have pushed for your bankruptcy (known as a “creditor’s petition”) or you will have taken the ball in your own hands and have voluntarily gone bankrupt (a “debtor’s petition”). Either way, assuming that you are insolvent, the Master in Bankruptcy will have granted a bankruptcy order.

As a bankrupt, all your assets immediately vest in the Official Receiver or a Trustee (Licensed Insolvency Practitioner). Their job is to convert these assets into cash to allow a payment (in full or in part) to go to your creditors. Everything is on the table –even the family home: although there is an initial period of grace of 12 months for the bankrupt to find someone to buy out their equity in the family home.

Bankruptcy therefore is a very serious matter. As a bankrupt, there are also personal restrictions on you:

• If you are self-employed, the business normally ceases and assets are sold;
• You cannot act as a company director;
• You cannot take credit of more than £500 without advising that you are a bankrupt;
• You must obtain the written consent of the Official Receiver if you want to travel to GB or ROI or apply to the Court for leave if you wish to travel to any other country.
• Bankruptcy will remain on your credit reference file for 6 years, leaving it difficult for you to obtain credit (you may say it is already nigh on impossible to obtain credit!

The significant rise in personal insolvency is being attributed by many to the large number of corporate insolvencies and the resultant effect for company directors of having provided substantial guarantees for company debt. With guarantees often running into tens (if not hundreds) of thousands, bankruptcy may well be the only answer for these individuals to get rid of this debt once and for all.

For some, however, it may not all be over in 12 months. If the Official Receiver finds that you have been dishonest or have acted inappropriately and are somehow to blame for your position, he may apply to the Court for a bankruptcy restrictions order- this may result it you being held as a bankrupt for between 2 and 15 years.

Meanwhile, for the likes of Sean FitzPatrick in the Republic, the sentence is much longer – bankrupts south of the border may not be discharged for up to 12 years. That might explain why there were only 17 bankruptcies last year in the Republic compared to more than 1,200 here.

As always, taking professional advice at the earliest possible opportunity is vital. Your creditors may be willing to consider an informal or formal arrangement and thus you can avoid bankruptcy – or it may be the case that there’s no alternative to bankruptcy, in which case may be best to get in (and get out) of bankruptcy at the earliest possible opportunity.

Gerard Gildernew is Partner in CavanaghKelly and can be contacted at Gerard.Gildernew@cavanaghkelly.com

Have you a question you would like answered? If so, please email us to businessreport@cavanaghkelly.com