Martine McCutchen is a recent example of yet another celebrity declared bankrupt. She joins other high profile figures such as Peter Stringfellow, George Best and Marvin Gaye who have all filed for bankruptcy in the past. Not unusually, her largest creditor is HMRC.
This case highlights the financial difficulties even high-profile individuals can encounter and what happens to those who face personal insolvency.
What is Bankruptcy?
Bankruptcy is a judicial process that applies to individual insolvencies as opposed to corporate insolvencies. During bankruptcy, a court passes all of the assets of a bankrupt to a specialist trustee in bankruptcy known as an Official Receiver, who then pays as much of the debt as possible. In some cases the bankrupt will have to enter an ‘income payment agreement’ to make payments towards their debts out of their income for up to three years.
Eventually a bankrupt will be discharged from all debts and can start afresh, even if not all of those debts are paid. Most individuals obtain a discharge order from the Official Receiver’s office within six months and there is automatic discharge after one year.
Bankruptcy may be declared when an individual has to pay an immediate debt but that individual does not have sufficient funds to pay or when a debt is due in the future and the individual has no reasonable prospect of being able to pay.
An unpaid creditor can make an individual bankrupt by petitioning the court and showing that the individual owes them at least £750 and does not have the ability to pay the debt. An individual may also petition for their own bankruptcy to relieve pressure from creditors who must then deal with the trustee.
Once the individual is declared bankrupt, the trustee has control over most of their property. Creditors must stop charging interest and are prevented from taking action to recover debt.
Some restrictions are placed on the activities of the bankrupt such as becoming a company director, being involved in the management of a company or applying for more than £500 credit without disclosing their bankruptcy.
Bankruptcy Restriction Orders
If the court decides that the bankruptcy has been caused by the individual’s recklessness, negligence or dishonesty, then they make a Bankruptcy Restriction Order which places strict restrictions on their activities for 2-15 years. These orders are only made in a minority of cases.
Bankruptcy is usually seen as a last resort as control is lost over all financial affairs for up to a year and assets will be sold to pay off debts. There are alternatives to consider before declaring bankruptcy, such as an Individual Voluntary Arrangement, a negotiation with the creditors or a Debt Relief Order.
If you or your business are facing financial difficulties it is important to take professional advice early and assess your options; Rollingsons has experienced lawyers who can assist you. For more information please contact one of our commercial lawyers on 0207 611 4848.