Insolvency Made Clear: A Guide for Debtors

Insolvency Law Made Clear – A Guide For Debtors
In general, the Trustee in Bankruptcy will want the bankrupt to keep
working. The bankrupt will sign an ‘income payment agreement’ (see
below), and the bankrupt will need a job in order to be able to make
the payments. A Trustee might even be prepared to write a reference
to reassure a nervous employer or prospective employer.
If the bankrupt themselves had employees, then those contracts will also not
automatically end. If the Trustee in Bankruptcy decides to keep them, this
counts as continuity of employment for various employment rights. However,
the Trustee would be entitled to dismiss the employees – for example, for redundancy
- and the employees can seek their redundancy payment from the
National Insurance Fund. This becomes a preferential debt and the Trustee will
repay the sum to the fund before the other unpaid creditors.
There is also no restriction on a bankrupt opening a new bank account, although
most banks will not offer this service to an undischarged bankrupt. Those that
do are unlikely to offer any credit facilities whatsoever, i.e. to offer a current
account with no overdraft.
2.9 Inability to obtain credit
It is a criminal offence for a bankrupt to borrow more than £500 without first
disclosing their status as an undischarged bankrupt (s360(1)(a) of the Act). This
would include a hire-purchase agreement or an agreement where the bankrupt
takes the goods early and pays in instalments over time. The criminal offence
applies regardless of the lender, and so it includes personal contacts. However,
the offence is only borrowing money without disclosing the status. It is not an
offence for a bankrupt to borrow money from a friend if that friend is aware that
they are an undischarged bankrupt.
Credit rating agencies (and so credit suppliers, like credit card companies and
payday lenders) will be aware of the bankrupt’s credit history. Professional lenders
are unlikely to lend during the bankruptcy at all. Even after the bankruptcy is
discharged lenders are unlikely to make a loan to a former bankrupt, and if they
do the loan will be at a higher interest rate to reflect the higher risk. Credit rating
agencies will keep a record of the bankruptcy for around six years. One of the
effects of bankruptcy in practice is that it will be a long time until an individual
can borrow money as freely as they did before.
The impact on an individual’s credit rating is mitigated by the fact that an individual
with high levels of debt is likely to have a low credit rating anyway. The
marginal effect of going bankrupt is likely to be small.
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