In my previous article, I looked at some of the issues of being made bankrupt. I described the two different types of bankruptcy – debtor and creditor. I explained how all the debts become due on the date of the bankruptcy order and how all the bankrupt’s assets, including their bank accounts, are frozen. And, in particular, I talked about the charges and fees that a bankrupt is saddled with as the trustee in bankruptcy pursues a resolution.
It is worth reminding ourselves of these costs. Firstly, the government levies an ad valorem tax on all the proceeds from the asset sales – a tax of 17 per cent. Next, there is no cap on the fees the insolvency practitioner can charge and these fees are typically around the 20 per cent mark, plus VAT naturally. The practitioner also takes a fee of 10 per cent on any disbursements. The official receiver gets a fee, although at £1,625 it seems reasonable compared with everything else that is happening. And, of course, there are the costs associated with selling the bankrupt’s home – estate agency commission, legal fees and so on.
All-in-all, as fees are piled upon fees, the bankrupt’s indebtedness doubles – in some cases more than doubles. Now, it has to be acknowledged that a person who has got into serious financial difficulties may see the option of declaring themselves bankrupt – a debtor bankruptcy – as a way out. He could be discharged after only a year and although the bankruptcy will remain on the record for six years, at least there is a faint light at the end of the tunnel.
Punishment
But what of the creditor bankrupt, especially the home-owning creditor bankrupt with enough equity to pay off the creditor who has forced the issue? While a creditor bankrupt may have played at brinksmanship and lost, they are now going to be punished mercilessly for ending up in the bankruptcy court. They seem to have no choice but to submit to the bankruptcy process, suffer all the costs and probably lose their home as well.
Probably lose their home? Almost certainly, more like. The issue here is that the insolvency practitioner, who is acting as the trustee in bankruptcy, has first call on the bankrupt individual’s equity in the property. But, in order to realise that first call, the trustee must achieve a sale of the home within three years of the bankruptcy order, otherwise the trustee’s share in the property re-invests in the bankrupt individual. This ‘use it or lose it’ rule came in with the Enterprise Act 2002 and it means that action on sales is being taken much more rapidly than it used to be.
It is therefore imperative that a home-owning creditor bankrupt moves quickly, because there is a route open to this type of bankrupt – annulment. But annulment is not easy to achieve without professional help so a service has been set up by specialist company, the Bankruptcy Protection Fund (BPF), to provide that help. The service is not for everybody, only home-owning creditor bankrupts with sufficient equity to pay off their unsecured debts.
Financial engineering
The service works like this. The bankrupt individual contacts BPF with details of the debt involved in the bankruptcy order plus details of all their other unsecured debts. The company also needs to know the value of the home and the mortgage details, at which point they can make an initial assessment as to whether an annulment is feasible.
If it is, the bankrupt’s mortgage broker arranges, via a leading packager, an application for one of the mortgage products designed expressly for the annulment process by a handful of specialist lenders. When assessing the application, the lender ignores the bankruptcy, the remortgage offer being conditional on the bankruptcy being annulled. Having identified all the unsecured debts and bankruptcy costs, BPF arranges bridging finance to redeem the debts, following which a court hearing is arranged to prove that there are no unsecured debts.
If there are no unsecured debts, then the individual is not bankrupt and the court annuls the bankruptcy order. It is as if it had never happened. As soon as the solicitor acting in the remortgage confirms that the bankruptcy has disappeared from the record, then the lender completes the re-mortgage and the bridging finance is repaid.
This may sound long-winded but it all happens reasonably quickly, with start to finish rarely taking more than three months. And there are major benefits here. The individual has not lost their home and has a quicker route back to being a prime lending risk. Furthermore, they have no bankruptcy record and they have achieved this much more quickly and at a far lower cost than with the bankruptcy process.
Overall, this is a smart piece of financial engineering and one where the result really is win-win. Unless, of course, you make your money as a bankruptcy trustee.
Wayne Smethurst is director of Glow Mortgages
