The darker side of bankruptcy

A frequent criticism of the bankruptcy law is the way the unscrupulous can appear to run up large debts, live the high life, and then petition for their own bankruptcy and walk away. Meanwhile, the more responsible in society scrimp and save to pay their bills, manage their loans carefully and ensure that they do not borrow more than they can afford to repay. Why should the reckless be able to abdicate responsibility for their debts?

The Enterprise Act 2002 addresses these problems and makes it more difficult for the dishonest bankrupt and easier for the unfortunate one.

The Act reduces the standard period for which bankrupts are subject to bankruptcy restrictions from three years to one year. However, if the Official Receiver feels a bankrupt is dishonest or blameworthy then he can be made the subject of a Bankruptcy Restriction Order (“BRO”), which lasts between two and fifteen years.

A bankrupt must not obtain credit of more than £500 without disclosing their bankruptcy, nor act in the management of a company, nor carry on business in a different name from that in which they were made bankrupt (unless it is made clear that the business previously traded under the insolvent name).

The BRO extends the restrictions of bankruptcy for the period of the order, and breach of these obligations may lead to prosecution and even imprisonment.

Behaviour leading to a BRO includes incurring debts that there is no reasonable expectation of being able to pay, gambling or indulging in other high life living that has contributed to bankruptcy or increased the debts owed, paying friends or family members before other creditors, and committing fraud.

Let me give three examples.

Frank, a publican, fraudulently sold two plasma screen televisions owned by a finance company. The televisions cost £7,500, and the finance company were owed £6,500 in the bankruptcy. A BRO of seven years was made.

David, a self-employed haulage contractor, made trading losses and cash withdrawals of £55,000 prior to his bankruptcy, and then failed to explain the withdrawals to the Official Receiver. He also failed to maintain, keep and deliver records to explain the trading losses. The court made a BRO of 9 years.

Another optimist, Bill, applied for a credit card on the fraudulent basis that his salary was double his actual earnings. He then withdrew money on the credit card to pay a loan shark, but was unfortunately unable to make the minimum monthly repayments. He therefore petitioned for his own bankruptcy, leaving the credit card debt unpaid. He accepted a BRU of four years.

A debtor can offer a Bankruptcy Restriction Undertaking (“BRU”) instead of going to court for an order to be made. The effect is the same.

Of course, these harsh restrictions will not apply if the bankrupt is not at fault. Those who behave responsibly can be discharged from their bankruptcy after twelve months, or an even shorter period if the Official Receiver’s enquiries are complete.

The new bankruptcy provisions provide a much fairer outcome all round.


Contact Sian Phillips on 01392 411221 for further information

Foot Anstey offers legal advice to both businesses and individuals in the South West with offices in Exeter, Plymouth and Taunton.
www.foot-ansteys.co.uk

Published 01/08/2006.