Bankruptcy is a legal process and is usually the option of ‘last resort’ when someone can’t pay their debts. Although different legislation applies in England and Wales, Northern Ireland and Scotland, the broad principles are the same. Bankruptcy involves the transfer of an individual’s assets into the hands of a trustee in bankruptcy (the ‘trustee’) for the benefit of the individual’s creditors. The bankruptcy proceedings will be initiated by either an individual applying to be made bankrupt or by one or more creditors presenting a bankruptcy petition to court. In either situation, a court will decide whether to issue a bankruptcy order depending on the facts of the case. However, in Scotland, the Accountant in Bankruptcy, an agency of the Scottish Government, can declare an individual bankrupt.
The trustee will be an official receiver (who is an officer of the court), the Accountant in Bankruptcy (in Scotland) or a licenced insolvency practitioner. It falls on the trustee to carry out certain duties relating to the bankruptcy. Generally, this will involve collecting information relating to the bankrupt’s financial affairs, disposing of assets held and making payments to creditors. Some assets can be protected, for example clothing, bedding, and furniture. It may also be possible to protect tools and vehicles necessary for the bankrupt’s employment or business.
Usually, a bankruptcy is automatically discharged after 12 months. However, the bankruptcy period may be extended if, for example, the bankrupt hasn't co-operated with the trustee.
Discharge means that a bankrupt is freed from the restrictions of bankruptcy and released from most of the debts they owe. It does not mean that they will automatically regain control of any remaining assets. The trustee could continue to administer the assets which formed the bankruptcy estate, including assets which may not be realisable until sometime in the future (for example, an endowment policy). Similarly, an income payments order or agreement requiring a bankrupt to make payments from their income towards their debts may continue beyond the date of discharge.