Published in Debt Advice Features on Saturday, March 17 2007

Bankruptcy law in the United Kingdom is differs dependant where you live, Bankruptcy Law is the same whether you live in England or Wales, the law differs form residents who live in Scotland and have done so for the greater part of six months.

If you live in either England and Wales this website is dedicated to provide information on bankruptcy.

The Bankruptcy Law in England and Wales has changed significantly over the years, bankruptcy has been around for a very, very long time. As you may be aware bankruptcy is governed by the High Court and The Insolvency Service, the change in bankruptcy over the years has been implemented by a series of “Acts” these acts didn’t start to come into play until 1883. Prior to 1883 bankruptcy was seen as a criminal offence which meant if you became subject to bankruptcy then the creditors could order the seizure of a debtor’s goods or his/hers arrest and or imprisonment.

Businesses or traders who became bankrupt could have faced the death penalty and this was the case well into the 18th century.  The bankruptcy law governed businesses and traders, individuals facing financial hardship faced prison if they could not sell their personal belongings to cover the debt. 1861 brought about that traders and non traders would come under the same ruling, 1869 was the year when imprisonment was reduced for people who became subject to bankruptcy.

During the Victorian period, businesses relied heavy on business credit, businesses were not prospering and individuals were scared of starting businesses because of the risk of becoming subject to bankruptcy. This prompted a major overhaul of the Insolvency and Bankruptcy Law, this happened in 1883 which modernised the law to merge it into 1 regime.

It was decided that all bankruptcy proceedings should be monitored and supervised by the courts. A public examination took place in an open court, the judges would investigate the causes for bankruptcy, they would look into the conduct of the bankruptcy using a “Statement of Affairs”. The reason why the examination took place in open court, was that bankruptcy affected the whole community, in addition to this any misconduct leading to bankruptcy was governed by a range of Bankruptcy offences and punishments, this regime carried on until 1914, when the new change was seen as a cleaning up operation.

The basis for the acts was to ensure that the whole community was not affected and ensured that the bankrupt would have to co-operate with the Official Receiver, if a person became subject to bankruptcy then they would be expelled from certain roles in public life and they would not be allowed to engage in a any work or activities that required an element of trust. If you were bankrupt you would have a black mark in society.

One thing was that an individual was not bankrupt for a particular time period , they could apply for discharge after the public examination was concluded again the application for discharge was heard in open court. Due to how humiliating a person would feel they could not deal with the examination in court again and would not apply for discharge meaning they would be bankrupt for the rest of their lives.

To separate people who were made bankrupt for unfortunate and unforeseen circumstances and those who had been negligent the Acts brought about the courts to issue individuals with a certificate. This certificate was issued to individuals who had suffered misfortune hence “Certificate of Misfortune” this certificate was rarely issued due to the strict guidelines for what was classed as misfortune.

The bankruptcy law stayed the same up until the Insolvency Act 1976 which introduced a limited automatic discharge, the court could make a bankruptcy order at the conclusion of the bankrupts public examination. if it was appropriate, the bankrupt would be discharged after five years. Otherwise, the Official Receiver would have to make an application for the discharge of the bankrupt within 12 months of the fifth year of the bankruptcy order.

The Law was the reviewed in 1977 and a report was drawn up known as the Cork Report, Sir Kenneth Cork and an review board looked into the basics of the insolvency law after the review they stated

“It is a basic objective of the law to support the maintenance of commercial morality and encourage the fulfillment of financial obligations. Insolvency must not be an easy solution for those who can bear with the stigma of their own failure.....”

They decided that the business insolvency had more implications than to an individual who became subject to bankruptcy.

A discharge was seen as a cooling off period whereby a person who became bankrupt could rehabilitate themselves financially. The report said that there should be an automatic discharge period of five years, but a person could apply for bankruptcy after 12 months of the bankruptcy order. The application for the discharge would coincide with the Official Receivers Report.

After the report the Government decided that they would prefer to adopt an automatic discharge period of 3 years, their reasoning was that the 3 years would in a modern society the emphasis should be on the rehabilitation of debtors and that a three year period of restriction is sufficient for those who have failed financially.

The Cork Report also recommended the introduction of new procedures for the administration of the affairs of insolvent debtors with a view to reserving bankruptcy to more serious cases where there was misconduct. The Report proposed a process of liquidation of assets to deal with less serious cases. Under this system the disabilities that applied to this category of debtor would have been less severe than for a bankrupt and it was proposed that the process would be completed and the debtor discharged within one year.

This recommendation was not taken forward. It was felt at that time that the level of inquiry required to determine the appropriate procedure for each debtor would place considerable additional demands on Official Receiver’s resources at a time when the government was seeking to effect a substantial reduction in the size of the Civil Service. In addition, the Government also felt that the (then) existing procedures, suitably modified, would allow the debtor “ample opportunity” to avoid bankruptcy if he or she was prepared to take active steps to that end.

In 1986 the insolvency act brought about further changes, these were trying to reduce the stigma attached to bankruptcy is meant that, they would abolish the concept of an “Act of Bankruptcy” automatic discharge for first time bankrupts after 3 years, measures were introduced to streamline the insolvency process, more protections was put in place for the bankrupts spouse and their rights when joint assets were taken into account when dealing with the bankruptcy estate and allowing the bankrupt to keep more personal assets than that of the 1914 act.

The modern bankruptcy law as it today was reformed through the “Enterprise Act 2002”

From the 1st April 2004 the law concerning bankruptcy has changed. The usual term for bankruptcy was previously 2-3 years. From 1st April 2004 most bankruptcies will be discharged within 12 months. The purpose for the changes is so that those who have been unavoidably made bankrupt for genuine reasons are given a better chance to start again.

The position is different for an individual who has been an un-discharged bankrupt more than once in the previous 15 years and who was still un-discharged at the time the new law came into force. In this case, if the court has previously granted a discharge, that order will continue to determine that date of discharge. If no such order has been made the bankrupt will be discharged on 1 April 2009 (5 years on from 1 April 2004), or by a court order.

People made bankrupt through a criminal bankruptcy can only be discharged by order of the court. Other significant changes relate to the treatment of assets. Whereas previously there was no time limit, The Act sets a limit of 3 years on the period during which the trustee in bankruptcy can deal with a bankrupt’s interest in a home which is the sole or principal home of the bankrupt, the bankrupt’s spouse or a former spouse. After this period it will revert back to the bankrupt (i.e. it will no longer form part of the bankruptcy estate).