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What is the Difference Between Bankruptcy and Insolvency?

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Vicky Biggs - Legal Director

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Article reviewed by Richard Wolff.
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What is the difference between bankruptcy and insolvency v2

People often use the terms insolvency and bankruptcy interchangeably. 

In England and Wales, insolvency and bankruptcy have distinct meanings, although they can often relate to similar circumstances. 

Our Insolvency and Restructuring lawyers explain the differences between insolvency and bankruptcy and what legal duties an individual has when a bankruptcy order is made

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What is insolvency?

Insolvency refers to a financial state of being unable to pay your debts and/or your debts exceeding the value of your assets. 

Both individuals and companies can become insolvent. 

The legal processes which arise differ depending on whether an individual or a company becomes insolvent. 

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What is insolvency

What is bankruptcy?

Bankruptcy is one way for individuals (commonly referred to as ‘debtors’) to respond to facing debts that they simply cannot pay or can be a means by which creditors seek to recover debts owing to them from a debtor. 

Bankruptcy does not apply to companies or partnerships. 

The bankruptcy process ensures that a debtor’s assets are shared amongst that person’s creditors and, with some restrictions, allows the debtor to make a fresh start free from their debts, usually a year after the bankruptcy order is made.    

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What is bankruptcy

How can an individual be made bankrupt?

A bankruptcy order can be made in the following circumstances:

  • An individual who cannot pay what they owe can apply to make themselves bankrupt;
  • A creditor can apply to make an individual bankrupt if that creditor is owed £5,000 or more or
  • An insolvency practitioner can make an individual bankrupt if they have broken the terms of an Individual Voluntary Arrangement.

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Bankruptcy

What happens after an individual is made bankrupt?

When a bankruptcy order is made, the official receiver for the region where the bankrupt is resident, an insolvency practitioner based in the Insolvency Service in England and Wales, usually deals with the early stages of the bankruptcy process. 

The official receiver will also be the individual’s trustee in bankruptcy unless an insolvency practitioner is appointed to take over that role. 

In bankruptcy, the trustee will realise any assets the debtor owns (over and above any reasonable domestic items and items needed for the debtor’s job) to distribute the money obtained amongst the debtor’s creditors. 

There is a statutory order in which creditors have to be paid, which means that secured creditors (for example, a mortgage lender) are paid first, followed by the costs and expenses of the bankruptcy, then preferential debts (for example, monies owed to HMRC) and then finally ordinary unsecured debts. 

After that, any debts owed to the debtor’s spouse or civil partner are paid together with any postponed or deferred debts.  Any surplus the trustee holds in bankruptcy once all debts and expenses have been paid is returned to the bankrupt. 

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Statutory duties owed by bankrupt individuals 

It is important to note that individuals have certain legal duties when a bankruptcy order is made. 

These include:

  • Attending an interview with the trustee in bankruptcy;
  • Not making payments directly to creditors once a bankruptcy order has been made;
  • Providing the trustee in bankruptcy with financial information, including a full list of assets;
  • Attending upon the trustee in bankruptcy and providing relevant information to the trustee in bankruptcy as and when reasonably requested to do;
  • Telling the trustee in bankruptcy about any increase in income during the bankruptcy period and
  • Attending court to provide information and to be privately examined to explain why you owe money if you are asked to do so should an application be made for the bankrupt to do so. 

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Restrictions on a bankrupt’s activities

Certain restrictions apply to individuals who go bankrupt.  These include:

  • Borrowing more than £500 without telling the lender you’re bankrupt;
  • Acting as a director of a company without the court’s permission; and
  • Creating, managing or promoting a limited company without the court’s permission. 

Breaking these restrictions can lead to criminal prosecution, as breaching them would constitute a bankruptcy offence. 

These restrictions end when the bankruptcy ends or is rescinded or annulled. 

These restrictions can also be extended (either by way of an undertaking or court order) if the trustee in bankruptcy believes the bankrupt has acted carelessly or dishonestly. 

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The first hearing of the bankruptcy petition

If I am insolvent, is bankruptcy my only option? 

If you have concerns about your financial position, seek professional advice from a regulated debt adviser. 

Depending on the amount of money and assets you have compared to the amount you owe to creditors, bankruptcy may not be the only option. 

A debt adviser can advise on whether different options are available to you, such as setting up a Debt Management Plan, an Administration Order or seeking an Individual Voluntary Arrangement with one’s creditors. 

You can also get temporary protection for up to 60 days from having to repay your creditors through the Breathing Space scheme. 

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Contact our Insolvency & Restructuring Solicitors

Please do not hesitate to contact Myerson’s experienced and knowledgeable Insolvency & Restructuring Team if you need assistance or advice relating to bankruptcy issues:

01619414000

Vicky Biggs's profile picture

Vicky Biggs

Legal Director

Vicky has over 13 years of experience acting as a Dispute Resolution and Insolvency solicitor. Vicky has specialist expertise in contentious insolvency matters, advising insolvency practitioners, directors in relation to both corporate and personal insolvency issues.

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