Tax Debt and Bankruptcy

The definition of Bankruptcy is the “legally declared inability or impairment of ability of an individual or organisation to pay their creditors” and can be either an involuntary bankruptcy, or a voluntary bankruptcy.

What are the consequences?

1. If you have assets that could be sold off to pay your debts, you will lose everything you have worked for. You will forfeit your home, business assets, bank accounts, savings and investments, and certain pension rights. All of these items will be used to pay of your debts.
2. You may have to use your salary to make payments towards your debts until you are discharged. During this period of one year, you may have to make payments from your salary, or from any other monies you receive, towards paying off your debts.
3. Bankrupt persons are not allowed to hold certain positions such as a company director. They are also not allowed to borrow an amount greater than £500 and not declare their financial status.
4. The London Gazette and national and/or local newspapers publish a list of all bankruptcies. This may be a cause of embarrassment for some people. While there is no longer a stigma attached to bankruptcy filings, some would feel better if no one knew about theirs. Credit bureaux will be informed of this bankruptcy and this will make it difficult to borrow money for about six years after your discharge.

Are there any advantages to bankruptcy proceedings?

There are a few benefits to being declared bankrupt. You will no longer be held legally responsible for sorting out your debt, as your Trustee will deal with any creditors. This alone is a welcome relief to many.

Debts that have not been settled by the date of your discharge will be written off. This in particular, may be a boon to those with few assets, as they may not lose much. They will be able to start afresh.

How the Enforcement Office deals with your file

The Enforcement Office will ask you to pay off the full amount quickly, normally within a period of fourteen days. You may also send them a proposal for payment. If you are able to pay off the debt within a year, they will accept it. Nonetheless, it is always better to pay it off in the shortest period possible.

Bankruptcy proceedings will be implemented if you fail to stick to a payment arrangement. The Enforcement Office will normally confirm this in writing.
The Enforcement Office does not follow the rules a normal creditor would. They might petition for bankruptcy in cases where there is no benefit to be had from the taxpayer. These cases could often cost the government money, as the bankrupt stands to lose their home and/or job and would then have to rely on benefits from the council and welfare agencies.

The Revenue Office may occasionally decide not to take further action against someone who is unable to pay his or her taxes. This is often as result of being without any valuable assets or because the person is old and suffering from long-term poor health. The situation is unlikely to change drastically in the near future. This decision does not mean the Revenue has written off the debt, it merely means that bankruptcy action may be taken when their circumstances improve.

What is the Statutory Demand?

Before any legal action can take place, you will be served a statutory demand. This is a legal document stating the amount owed to the Revenue and will normally be hand delivered to you.

The law states you have to apply to set aside a statutory demand. This applies to all such demands from any creditor and would apply if the amounts demanded were not due. Section 70 of the Taxes Management Act 1970 states the Revenue will produce the certificates showing what tax has been charged yet has not been paid. The courts would accept this as sufficient evidence that tax is due.

The petition and hearing for bankruptcy

Three weeks after the service of a Statutory Demand on a taxpayer, the Revenue may then proceed with a bankruptcy petition. This petition, filed at the High Court in London, is then served on you personally. There exists no way of avoiding the petition, as the court may serve it elsewhere, for example by post or advertisement. The petition contains information on the tax due and gives the exact date and time when the case is scheduled for hearing at the Bankruptcy Court.

There should be a difference of at least ten working days between when the hearing is scheduled and when the petition was served on you.

The bankruptcy hearing is not a formal procedure, though they are heard in private before a Bankruptcy Registrar at the High Court in London. You need also not have formal representation and could ask a friend or relative to present your case, though it may be most beneficial to use the services of a lawyer, accountant, or any other advisor.

Opposing a bankruptcy petition in a tax case may not have good enough grounds. Nonetheless, you are allowed to ask the court for an adjournment, as this will give you ample time to prepare yourself. The court may even be willing to allow an adjournment of up to two months. In the deferment of the case, you will have enough time to either raise the money, reach a payment agreement with the Revenue, contest the amount asked for, or file a complaint.

If you are successful in any of the above-mentioned points, the Revenue may then dismiss the petition. This will then be the end of the matter.

Should you not be successful, you will face bankruptcy proceedings.

Instituting the bankruptcy order

The Official Receiver will request an interview with you shortly after the bankruptcy order has been given. This person works within the Insolvency Service of the Department of Trade and Industry.

Before the interview with the Official Receiver, you will receive a questionnaire asking for exact details of your finances. You will be asked for access to any existing financial records such as bank and building society passbooks and statements, company shares and life insurance policies.

The Official Receiver will appoint you a Trustee, who will take care of your affairs during your bankruptcy. Those with valuable assets or a high income may be appointed an authorised insolvency practitioner as their Trustee.

The Trustee’s core responsibility is to handle your finances during the period of bankruptcy. In order to eliminate your debt, he or she would have to sell off your assets and distribute the funds to your creditors. The easiest way of doing this would be to obtain an order or have you agree to part with a certain percentage of your income for up to three years. This should still leave you with enough left over for your normal living expenses.

Any sudden increases in income should be reported to the Trustee, as this may also be used towards repaying the debts. The Trustee will consider if you have been guilty of any offence in relation to the bankruptcy and your conduct before and after the bankruptcy order will be probed. If they find anything, it will act against you and the Revenue will have grounds on which to implement a Bankruptcy Restrictions Order against you.

If, after paying off all the creditors in full, there is still money left over from the sale of your assets, it will be returned to you and the bankruptcy order will be rescinded.

The financial implications of a bankruptcy

Bankruptcies are expensive, as the costs and fees are borne by the taxpayer. However, this money is recouped from the sums raised by the Trustee and is paid before any creditor gets his or her money.

Taxpayers, whose debts exceed their assets, are better off than those whose assets exceed their debts. Depending on the circumstances of the case, the cost of bankruptcy might be a considerable amount and is deducted first. This will leave the creditors with far less than what they would have received.

If you suspect that your assets are worth more than your debts, you should do everything possible to avoid a bankruptcy order.

What happens after a bankruptcy order?

Discharge happens automatically after one year and you are no longer restricted in your financial dealings. You are no longer legally responsible for the debts that you owed at the time of the bankruptcy order and, apart from certain debts such as fines, student loans and unpaid maintenance, will be debt-free.

Even if you have been declared bankrupt on previous occasions, you may still be automatically discharged. This information and any other bankruptcy filings in the previous six years will be taken into account if the court applies for a Bankruptcy Restrictions Order against you.

There are transitional provisions in place for existing first time bankrupts. They will be discharged on the earlier of the normal two/three year anniversary of the order, or one year from commencement of the policy on 1 April 2004.

Second-time bankrupts are discharged five years from commencement or by application should they be eligible earlier.

Individual voluntary arrangements

It is possible to avoid the worries and expense of bankruptcy by entering into an individual voluntary arrangement (IVA) with your creditors. Such arrangements may involve paying them part, or all of your debts over a period agreed on by both parties. This agreement will only be allowed if it will pay off 75% of the debt you owe your creditors. The Revenue may object to the agreement if they owe more than 25% of your debt.

Your creditors may find this is an attractive option, as it is less expensive and will leave them with more money. Business owners need not close their businesses and they will be able to raise even more money to pay off the debts.

The benefit of an Individual Voluntary Arrangement is lost to those who are unable to pay the necessary fees to an insolvency practitioner, or those whose creditors vote against the process. Contact an insolvency practitioner and ask to have a short meeting with him or her to discuss your options. This meeting should not be too expensive; it may even be free of charge.

Declaring yourself bankrupt

If you do not foresee your situation improving in the near future, you should consider declaring yourself bankrupt. This is a less worrisome process, as you will avoid being declared bankrupt by a creditor.

The High Court or your nearest County Court can help you start the process. The court staff should be able to help you with the forms. Take some money with to cover the £310 deposit and a further £140 towards the court fees.

The benefit to this process is the sense of control this gives you over your circumstances. Instead of leaving everything to the creditors, you are taking charge of the situation and can speed up the process, which means a speedier discharge.

What bankruptcy can mean to your home

Protecting your assets is a natural reaction, therefore you should do everything possible to prevent losing your home.

Tenants may be especially vulnerable; their landlords can end the lease if they become bankrupt. It is unlikely that you will lose your home if you live in a council or housing association property.

Property-owners whose house is worth more than the amount owed on the mortgage or other loans charged to it, have equity in the property. The Trustee will probably want to sell it and use the equity to pay off the creditors. People with a spouse or children living with them, will usually receive twelve months in which to make alternative living arrangements, or to find a seller for the interest in the property.

Properties with no equity (its value is lower than the loan/mortgage charged on it) are liable to have the Trustee obtain a charging order on it. The Trustee will allow you residence in the property though it has an interest in it. The interest will be restricted to the value of the equity at the time of the charging order plus statutory interest until it is realised. Realisation does not have a time limit but any rise in the property’s value will not accrue in full because of this restriction.

Trustees will therefore have little reason to delay realisation. It is worthwhile to avoid any doubt over the interest in the property and to have a friend or relative buy it from the Trustee after the bankruptcy order. Trustees now have to handle the property’s interest within three years lest it reverts to the bankrupt.

How being bankrupt will affect your job

Bankrupt employees may not be severely affected by being bankrupt, as they can continue in the same job as before. Very often, their employers may not even be aware that they have been declared bankrupt. Other jobs stipulate in the contract that the employee should of sound financial health. The contact may be terminated if this is not adhered to.

Some jobs require the employee to be solvent: MPs, company directors (unless they obtain special leave from the court), Councilors, Magistrate or Estate Agents.

Self-employed people in certain professions may continue as before, especially if they are a mini-cab driver, actor or construction worker. You will also still be able to keep the tools of your trade. Certain other professional organisations may forbid you from practicing while being bankrupt. These may include, but not be limited to, accountants and solicitors.

A business that employs staff, has a fair amount of trade stock, and relies on trade credit, may be closed down or sold by the Trustee.

Your tax affairs after bankruptcy

Arrears tax is generally deducted from the money raised by the Trustee. The Trustee will pay all the arrears up to and including the tax year in which you are made bankrupt.

Employed people who are paying tax under Pay As You Earn (PAYE) should ask the tax office to put them onto a Nil tax code. This should be done after the bankruptcy order has been effected. You will not pay income tax for the rest of the tax year and the Revenue should refund any incorrect charges.

Those who move to another employer during the tax year will not be governed by the same rule and tax will be deducted on an emergency basis.

Self-employed people will only start paying tax from the following tax year. However, self-employed people in the construction industry will continue having tax deducted off their earnings throughout the course of their bankruptcy.

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Source: http:///www.taxdebts.co.uk